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Shares of Pitney Bowes (NYSE:PBI) are rising sharply on the back of the release of its second-quarter earnings report and the sale of its Management Services business.

The move to bolster liquidity and the overall balance sheet is welcomed given the significant debt position of the firm combined with the troubled operating performance. Yet I remain cautious due to the lack of progress on an operating basis.

Second-Quarter Results

Pitney Bowes generated second-quarter revenues of $1.16 billion, down 0.7% on the year before. Revenues came in just below consensus estimates of $1.19 billion.

Income from operations fell by 85% towards $15.4 million as the firm took $97.8 million in goodwill impairment charges. Adding to that a loss of $20.1 million related to discontinued operations, and the company reported a $9.2 million loss.

While GAAP losses of $0.05 per share are disappointing, adjusted earnings of $0.52 per share came in far ahead of consensus estimates of $0.44 per share.

CEO Marc Lautenbach commented on the developments over the past quarter, "Pitney Bowes is making solid progress on its transformative journey to improve the growth profile and profitability of the business. The actions we have taken over the last six months and the results for this quarter are consistent with the Company's long-term strategies that we detailed at Analyst Day in May."

Sale Of Management Services Business

At the same time, Pitney Bowes announced the sale of Pitney Bowes Management Services for $400 million in cash. Funds affiliated with Apollo Global Management (NYSE:APO) will acquire the business.

The business is expected to benefit from operating as a stand-alone business, as it results in a greater focus. The operations have a strong management team and client list, but the activities no longer provide "a strategy fit" as the company has narrowed its strategic focus.

As outlined during its analyst day, Pitney Bowes will focus on Small and Medium Business Mail, Enterprise Mail an Services, and Digital Commerce Solutions.

The deal is expected to close in the fourth quarter of 2013.

Valuation

Pitney Bowes ended its second quarter with $631.5 million in cash, equivalents and short-term investments. The company operates with $3.65 billion in long-term debt, for a net debt position of around $3.0 billion.

Revenues for the first six months of the year came in at $2.28 billion, down slightly from last year. Net profits fell by more than three quarters to just $58 million.

Annual revenues will come in roughly flat compared to last year. Excluding the revenues being generated by the divested Management Services, revenues are expected to come in around $4.0 billion. GAAP earnings are expected to come in between $1.07 and $1.22 per share, based on continuing operations. Adjusted earnings, which exclude restructuring charges and impairment charges, are expected to come in between $1.62 and $1.77 per share.

Factoring in a 13% jump on Tuesday, the market values Pitney Bowes at $3.3 billion. This values the firm's operating assets at 0.8 times annual revenues and roughly 10 times normalized earnings.

After it recently cut its dividend in half, Pitney Bowes currently still pays generous quarterly dividends of $0.1875 per share, for an annual dividend yield of 4.5%.

Some Historical Perspective

Long-term investors have seen very poor returns. Shares were trading at all-time highs of $70 back in 1999 before they pulled back significantly. In fact, shares recovered and were approaching $50 in 2007 but have steadily fallen to lows of $10 earlier this year.

Yet investors have finally seen some decent returns, as shares have been trading with year-to-date returns of 60% after the company outlined the strategic direction at its analyst day.

Between 2009 and 2012, revenues have fallen by roughly 10% towards $4.4 billion. Revenues are expected to fall towards the $4 billion mark on the back of the divestment as mentioned above. At the same time, net earnings stabilized around the $450 million level, but will take a hit in 2013 on restructuring charges.

Investment Thesis

Tuesday's jump is largely driven by the beat in adjusted earnings per share and the sale of its Management Services business. Including the current cash position and the proceeds from the divestment, liquidity totals some $1 billion. This provides the company with sufficient cash to meet its repayment schedule for the period of 2013-2015.

The net debt position of $3 billion could fall towards $2.6 billion on the back of the sale of the business, which is needed as revenues continue to be under pressure. On the positive side, the pace of revenue declines is slowing down and adjusted earnings per share actually increased a little bit.

Yet the prospects for the remaining businesses remain tough as they are tied to the mail market. Some 60% of Pitney's revenues are tied to mail, and mail generates even a greater portion of its operating earnings. Yet the company is launching many initiatives to turn the tide and it has shored up its balance sheet. The recent dividend cut will save some $160 million per annum, sufficient to cover the $120 million in annual interest payments.

Investors are relieved with the latest news flow, and they should be. The divestiture, coupled with the dividend cut is aggressively reducing the leverage concerns. Yet operating concerns remain, and investors should not blindly pick up shares to earn a 4.5% dividend yield.

I remain on the sidelines. It is not leverage which worries me the most, but I would like to see some operating improvements before considering taking a position.

Source: Pitney Bowes Bolsters Liquidity, Yet Operating Performance Remains Troublesome