Before heading into any analysis of Stamps.com’s financials or business prospects, it is necessary to clear up any misconceptions that the .com portion of their name may create. This is not a typical internet company, nor should it be valued as one. As the seller of a boring product with limited growth potential, Stamps.com is better looked at as a retailer with modest but above average growth rates.
Through an agreement with the United States Postal Service, Stamps.com enables customers to directly purchase and print out approved postage right from their homes or offices. The majority of their revenues are derived from their PC Postage service, which allows customers to print out postage in the form of a bar-code, generating $16.9 million in sales in the most recent quarter, an increase of 15% over the prior year’s comparable period.
PhotoStamps, a service patented by Stamps.com, accounted for the rest of the company’s revenue and is the faster growing segment, generating sales of $8 million in Q4 2006, an increase of 35% versus Q4 2005. As a whole, Stamps.com reported sales of $25 million and net income of $4.7 million or $0.20 per share in the 4th Quarter and earnings of $0.69 per share for the full year 2006.
Selling a boring product and nothing more, this is a rather boring company. That is not a bad thing. With boringness comes consistency. Unless we wake up to one day find mail obsolete in our country within the next few years, this is a company with a strong recurring customer base that should continue to expand as more and more individuals and businesses discover the ease at which they can purchase their postage without leaving their homes or offices.
Competition would be hard pressed to find competitive advantages over the service Stamps.com offerings, given the virtual absence of ability to undercut Stamps.com’s prices, as postage sells at a fixed rate determined by the United States Postal Service no matter who the reseller is. Given these facts, Stamps.com does not appear to be at risk of experiencing declining revenues or rapidly eroding gross margins in the foreseeable future.
The strength of Stamps.com balance sheet is extremely noteworthy. With a market cap of only $323 million, the $106 million of cash of their balance sheet represents an amount equal to over $4.65 per share and to nearly 1/3 of their current market value. The company is using this large cash position to benefit shareholders through a recently authorized $20 million share repurchase plan, on top of an already completed $32 million in share buybacks since 2005. Stamps.com is currently expecting 2007 revenues of $90 to $100 million and earnings per share between $0.70 and $0.80. Given the authorized buyback in place, they are positioning themselves to come in at the high end of that earnings range.
As mentioned previously, this company is more appropriately valued as a retailer than an internet company, considering they operate in a very contained niche. Taking this into account, a P/E of 20 is justifiable for a retailer with above average growth rates, especially considering their web based business is less capital intensive allowing for greater retained earnings than a typical brick and mortar retailer. By using an earnings target in the middle of company released guidance, $0.75, and applying a multiple of 20, we arrive at a fair enterprise value of $15.00 per share. If their buyback enables them to hit the high end of their guided range, $0.80, an enterprise value of $16.00 is fair.
Add in $4 per share in cash, and we arrive at a fair market value of $20.00 within the next 12 months.
Disclosure: Author Joseph Urgo does not have a position in Stamps.com.
STMP 1-yr. chart:
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