Although Pitney Bowes (PBI) is struggling to hold on to its sales, we were considering it as an investment based on its (at the time) 10% dividend yield (before its recent dividend cut of 50%) and its free cash flow yield of 16%. Although it is a potential good value, it is struggling due to its streak of revenue declines. In hindsight, we think maybe Pitney Bowes' former CEO Michael Critelli's deal-crazed acquisition spree was not the best thing for the company's health. From 2000-2007, Pitney Bowes spent $2.5B on 83 acquisitions. PB's stock was dead money from 2000-2007 and has deteriorated since then. The good news for us is that it gives us a potential investment opportunity to analyze and evaluate. In addition to hiring Marc Lautenbach away from International Business Machines (IBM) to serve as its new CEO, PBI also recently hired Mark Wright as its new Software Division President and Mark Shearer as its EVP and president of the SMB mailing solutions business.
Corporate Highlights or Lowlights (Depends on your view)
PBI announced recently that its sales have sagged by 1.4% in Q4 2012 versus Q4 2011 levels, and by 4.3% year-over-year in the FY 2012 period versus the FY 2011 period. Unlike in Q3 2012, in which all of its revenue streams saw year-over-year sales declines ranging from 2.07% for its support services to 17.4% for its software revenues, three of its revenue streams generated a slight uptick in Q4 2012 versus the prior year period. Although its Q4 2012 and FY 2012 net income was up by about ~$120M in each period versus Q4 2011 and FY 2011 levels, this was due to reduced non-recurring charges taken in the applicable periods.
PBI's EBIT declined by 9% in Q4 2012 and 8% in FY 2012 compared to Q4 2011 and FY 2011 primarily due to steadily declining sales performance. Although the company was able to reduce its operating expenses during the year, these operating cost reductions only offset about 75% of PBI's year-over-year sales reductions. PBI's stock sold off by 13% the day after its Q3 2012 results were released, but shot up 20% the day it released its Q4 2012 earnings. We think investors were starting to see a potential bottom in PBI's performance and that it was maintaining its previously lofty $1.50/share dividend (before it cut it down to $.75/share). Also we think that investors were pleased that the company only took $22M in restructuring charges for Q4 2012.
Source: Pitney Bowes' Q4 2012 Report
Business Line Summary
PBI has two business divisions, one focused on large business customers (Enterprise Business Solutions) and the other focused on smaller customers (Small & Medium Business Solutions). Both of these divisions saw sagging revenue results throughout the business units (with the exception of Mail Services) in each division. The only business unit that saw a revenue increase during the year was the Mail Services business, which saw 8% year-over-year revenue growth. Q4 2012 year-over-year results were better as the SMB division's revenue decline was only 3% and the Enterprise Business Solutions division actually eked out 58bp of revenue growth. However, both divisions endured EBIT declines of 9% year-over-year in Q4 2012. For FY 2012 versus FY 2011, the only business unit that enjoyed EBIT growth was PBI's Marketing Services business. PBI Marketing Services generated 7% year-over-year EBIT growth, but this was not enough to offset EBIT declines of 1% to 28% in the rest of PBI's business units.
Source: Pitney Bowes' Q4 2012 Report
Corporate Asset Management
The company paid down $550M in maturing debt in its first 9 months of FY 2012 by utilizing free cash flows as well as existing cash balances. PBI bolstered its liquidity by raising $340M from the sale of new debt in Q4 2012. $230M was raised from the sale of term loans due in 2015 and 2016 and carrying a variable interest rate of LIBOR plus 2.25%, and $110M was raised from a 10 year callable fixed rate note with a 5.25% coupon. The company has $375M in maturing debt due in the first half of 2013. The company refrained from raising its dividend earlier in the year for the first time in 30 years, and recently cut it. PBI generated $660M in operating cash flows in 2012, which was a decline from $949M in 2011. This decline was due was due to $207M in higher tax payments in 2012, as a result of tax payments related to the sale of leveraged lease assets, the loss of bonus depreciation and higher income tax refunds received in 2011, as well as lower collections of finance and accounts receivables in 2012.
Despite the decline in its operating and free cash flows in 2012 versus 2011 levels, the company still generated $589M in free cash flows during 2012. The company has between $300M-$600M in maturing debt due each year from 2013-2019, and we believe that it should continue its efforts to pay off its maturing debt in part from the sale of new debt (refinancing) as well as through its free cash flows. This way, it keeps the credit rating agencies from reducing the credit rating further and makes it so investors don't perceive PBI as part of the extend and pretend game. We don't expect PBI to need to resort to issuing stock to bolster its financial position (other than employee stock compensation programs).
Source: Morningstar Direct
Will PBI's New Executives Make Their Mark?
Pitney Bowes has recently engaged in reshuffling its executive suite. We previously discussed how Pitney Bowes had hired Marc Lautenbach away from IBM back in December to replace Murray Martin. We believe that Murray Martin retired due to ill health, as PBI's investors and Board of Directors were sick and tired of seeing PBI's share price sag under Martin's regime. Murray Martin's predecessor, Michael Critelli, spent $2.5B to acquire 83 companies as part of a deal-crazed acquisition spree in order to try to grow Pitney Bowes. Lautenbach earned a reputation for expertise in business transformation through his executive roles at IBM, and he will need it to stabilize Pitney Bowes' performance and to reverse PBI's sliding share price.
Pitney Bowes recently announced that John O'Hara (Pitney Bowes' Software Division President) would be leaving the company. O'Hara joined Pitney Bowes in the middle of 2006 when his employer was acquired by PBI. We believe that PBI's new CEO Marc Lautenbach probably decided to ask O'Hara to leave because he was unimpressed with the performance of PBI's Software Business Line while O'Hara was running it. PBI hired Mark Wright to succeed him. Wright previously served as Executive Vice President of Infor Global Solutions. Although Infor is a private company, it files financial reports with the SEC. Let's hope that Mark Wright's performance running Pitney Bowes Software is better than Infor Global Solutions' performance. We say this because Infor's growth and cash flow performance were pedestrian at best. Plus, the bulk of the company's $556.5M of adjusted EBITDA in YTD 2013 was allocated to Depreciation ($209.5M), Acquisition and restructuring costs ($23.4M) and Interest Expense ($315M). We can see that PBI's long-suffering shareholders are hoping that its new executives make a positive mark on this once great company.
Pitney Bowes also announced that Leslie Abi-Karam (President of Pitney Bowes' communications unit) left the company. PBI also recently added Mark Shearer as EVP and President of PBI's Small and Medium Size Business mailing solutions business unit. We believe that Marc Lautenbach may have had a hand in Mr. Shearer's hiring, as Shearer was a fellow IBMer as well. Shearer worked for IBM in various roles, including as vice president of marketing and strategy for its $20 billion hardware businesses.
In conclusion, while we see things in Pitney Bowes that we like, we believe that investors should remain cautious with regard to entering a position in the stock (whether they go short or long). Considering that PBI's stock was dead-money (except for dividends) from 2000-2007 and has been deteriorating thanks to the company's sagging revenue results since 2007, we believe that investors need to be careful before trying to get PBI's dividend. We weren't the only investors attracted to PBI, though we needed more than a 10% yield (now 5.55% after its dividend cut) or even a 16% free cash flow yield to jump on in. Because of its yield, we believe investors can do no wrong by following it and using the published research about the company to augment any research done on their part in order to buy in when the time is right and to avoid trying to catch a falling knife or buying after a dead-cat bounce.
Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.