Seeking Alpha
Long/short equity, contrarian, value, special situations
Profile| Send Message| ()  

Stamps.com (STMP) enables small businesses and individuals to purchase USPS stamps and other shipping supplies from its website. The stock is trading at levels not seen since April 2006.

STMP Chart

STMP data by YCharts

Only 4 analysts cover this stock and the mean recommendation on the stock is "BUY" with a high target of $39.75. As per Yahoo Finance, it was upgraded to "Outperform" by Northland Securities on May 7th 2012. After it posted a record EPS of $0.57 this quarter, the stock jumped by nearly 22%. But I believe that the financials do not paint a bullish picture for the stock. And the run in the stock price is likely to be reversed in the coming quarters.

The Top Line

Due to the seasonality of the business, I have presented below the annual financials from the company's website.(Source: 10Ks)

year (all figures in $ millions)201220112010200920082007
Revenues115.66101.5985.5482.1284.9185.81
Revenue Growth0.140.190.04-0.03-0.01
AR14.4310.474.874.374.163.73
AR growth0.381.150.110.050.12
Inventories3.402.202.702.002.800.00
increase in inventories0.55-0.190.35-0.29
AR Allowance0.240.120.110.000.000.02
Concentration of AR (% from a single customer/partner)0.400.420.210.100.000.00

The company revenues have grown significantly from $85.8 million in 2007 to $115.66 million in 2012. But the revenue growth really accelerated in 2011 and 2012, when it grew at 19% and 14% respectively. However, during the same period, Accounts Receivables (AR) grew at a much faster rate of 115% in 2011 and 38% in 2012. It is very surprising that as per the annual reports, while no customer accounted for more than 10% of the revenues since 2009, STMP had one customer/partner that represented approximately 40%, 42% and 21% of the AR in the financial years 2012, 2011 and 2010 respectively. Any potential investor should be aware of this development.

The Bottom Line

While the concentration risk has increased in the top line, the policies adopted by the company has made the bottom line highly unpredictable. It now depends a lot on the "Deferred Tax Assets" and the release of "Valuation Allowance" that will determine the future profitability of the company.

As per the latest 10Q, the company has NOL carryforwards of approximately $205 million and $100 million for federal and state income tax purposes, respectively as of March 2013. In its latest 10K, the company has also stated that:

We have available tax credit carryforwards of approximately $5.3 million and $3.1 million for federal and state income tax purposes, respectively at December 31, 2012, which can be carried forward to offset future taxable liabilities. Our federal NOLs will begin to expire in 2020, and our state NOLs will begin to expire in 2013. The federal tax credits begin to expire in 2018. Under California law, California tax credits do not have an expiration date.

To really capture the effect of NOL Carryforwards on the bottom line, one has to look at the difference between Net income if statutory income taxes were paid and Net Income due to the tax benefits from NOL.

year (all figures in $ millions)20122011201020092008
Income Before Taxes24.7017.791.5876.737.36
Net income with statutory taxes15.8811.731.054.444.90
Net income with tax benefits38.5626.275.536.1810.15

One may argue that the Income Before Taxes have also risen substantially from FY2010. But if we factor the ARs of $14 million (Only one customer accounts for 40% of the ARs), then the sustainability of the revenues and the income before taxes becomes questionable.

Essentially, the top line is a function of ARs and the Net Income is a function of Total Deferred Tax Assets (or NOL Carryforwards) and Release of Valuation Allowance.

Year (all figures in $ millions)20122011201020092008
Total Deferred Tax Assets71.8785.3094.3194.9395.25
NOL Carryforwards63.8377.7485.4587.0990.06

With variations in valuation allowance, the company will be able to smoothen/increase the earnings in the short run. But as the Total deferred tax assets keep reducing, the game will end. Some of the tax benefits from NOL carryforwards will expire in 2013 and the federal NOL tax benefits will start expiring in 2020.

The Catalyst: Under the IRC code Section 382, if the "Change of Ownership" is triggered, the NOL carryforwards may be impaired and the Tax benefits will be partly lost. The latest Form 10Q (March 2013) states that:

A change in ownership can occur whenever there is a shift in ownership by more than 50 percentage points by one or more "5% shareholders" within a three-year period. We estimate that as of March 31, 2013, we were at approximately a 20% level compared with the 50% level that would trigger impairment of our NOL asset.

Thus if institutions began purchasing the shares to take advantage of the company's tax benefits, it may inadvertently impair the very benefits that is giving the company a higher valuation and end the game.

Conclusion: I believe that the financials do not make the company's business a long-term investment bet. In fact, gutsy investors can short this stock, when they believe that revenue growth has started slowing down and the ownership levels may trigger a "Change of Ownership." This may cause some uncertainty and several 5% owners may sell the stock at the same time and the shorts can benefit from the exodus.

(Sources: Form 10Ks and Form 10Qs)

Source: Stamps.com - A Short Story