Pitney Bowes (PBI) has been providing postage-related products since the early 1900s, but the horse they've been riding on is starting to get tired. In "Projecting U.S. Mail Volumes to 2020" (pdf), a document prepared by the Boston Consulting Group, Figure 1 projects the total volume of U.S. mail continuing to decline through the year 2020. The peak volume for U.S. mail appears to have occurred in 2006 at 213 billion pieces of mail.
The amount of mail delivered sharply dropped from 2008 to 2009, as more information formerly delivered via mail was delivered electronically. The graph in Figure 1 shows the volume of mail dropping slightly every year through 2020. Pitney Bowes better hope the Boston Consulting Group is correct, as a precipitous drop in mail volume could negatively impact the company's revenues and profits.
The first horse the company attempted to switch to was the Strategic Transformation program initiated in 2009. This was merely an attempt to squeeze as much performance and efficiency out of the old horse as possible, but this approach can only go so far, as when the horse starts frothing, there's not much more to be gained through continued coercing.
Yesterday, February 2, 2012, the company opened its new Global Technology Center in Danbury, Connecticut, aimed at helping businesses grow by building customer loyalty and increasing profitability through highly personalized communications. From this video, it appears the Global Technology Center is mostly showing off stuff related to the frothing horse (postage related). About two-thirds through the video, there did appear to be some new horse products presented (2:07 mark) and again near the very end of the video (3:05 mark).
Pitney Bowes needs to find a new horse to ride. The most recent horse the company appears to be transitioning toward is software and cloud computing.
In 2007, the company purchased MapInfo, a Microsoft Windows-based geographic analysis application which provides mapping and geographic analysis. The company might want to keep an eye on a little company called Google (GOOG) and its Google Maps platform.
In the cloud computing space, the company launched the pbSmartPostage™ platform in 2011, enabling businesses to apply postage to letters, shipping labels and packages from a PC with an Internet connection. Pricing for the pbSmartPostage service starts at $14.99/month. The U.S. postal service has a similar offering without a monthly fee, called USPS Shipping Assistant®. Hope pbSmartPostage has some significant advantages over the U.S. postal service offering, or this might be a dead horse.
Volly, another cloud-based initiative, provides a secure digital platform where customers can receive information securely, like credit card statements, bills, etc. Volly sounds like a good idea, but maybe a little late, banks have been able to process e-bills for several years.
In the company's most recent Q3 2011 conference call held on November 1, 2011, the company reported revenue of $1.3 billion, which was 3% less than the prior year. Customers delaying capital and lease commitments due to global volatility was given as a reason for the poor results. In the call, the company indicated every business area was negatively affected except software which experienced a 15% increase in revenue during the quarter. Demand for the company's software products was especially strong in the Americas and Asia-Pacific.
If the Boston Consulting Group's analysis is correct, Pitney Bowes has some time to switch horses and with the company's large and diverse customer base, they certainly have adequate resources for making the transition. And, the company appears to be switching to a good horse, but they will find the competition with the new horse is much tougher than they are accustomed.
Competitors to Pitney Bowes include Neopost (which is private), Siemens (SI) and Xerox (XRX).
The company's annual dividend yield of 7.8% is very attractive, with its next dividend payment $0.375 scheduled for March 12, 2012 to stock holders of record on February 17, 2012, resulting in an ex-dividend date of February 15, 2012.
Pitney Bowes stock price has been on the downswing over the last year, as shown below:
Warren Buffett is oft quoted as saying he seeks to buy companies while they're on the operating table. Pitney Bowes is definitely a company on the operating table, but it remains to be seen whether the surgeon can save the company, or the company ends up flat lining.
With Pitney Bowes upcoming earnings conference call on February 9, 2012, an investor might be concerned the company announces bad news, resulting in a continued drop in the company's stock price. An investor in this situation might consider entering a married put for the stock which provides protection and also enables participation in the appreciation in the stock's price. A married put may be entered by purchasing a put against a stock.
Using PowerOptions tools, a table of married put positions were found, as shown below:
The second married position using a 2012 July 20 put at $2.35 for protection with a maximum potential loss of 7.4% looks attractive. By including the upcoming dividend and a 2nd potential dividend, the maximum risk for the married put can be reduced to 4%. A profit/loss graph for one contract of the married put position is shown below:
The married put position provides protection in case the price of the stock drops, yet provides participation if the price of the stock increases. If the price of the stock increases above the $20 strike price of the put option, a call option can be sold per RadioActiveTrading.com constraints creating a collar which decreases the maximum risk, yet enables a potential profit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
