- The multiples that the company is trading at suggest that it is overvalued.
- We cannot understand why the market assigns such large multiples in the company while at the same time earnings are declining.
- As a company with a 100-year history, Pitney Bowes does well to ride the wave of internet economy, but, at the current price, we believe it is overvalued.
During the recent years stocks have been the champions regarding their returns. If individual investors just bought the entire S&P 500 they would have made substantial returns, possibly much more than they otherwise would have. The COVID-19 pandemic came at a moment when there was a debate going on about how high can stock prices go. And such an unprecedented event caused price action exaggerations. From the one side there were retail focused companies that experienced much pain, and from the other side there were companies focused in the so called internet economy and got boosted. But how justified are these valuations? In the case of Pitney Bowes Inc. (NYSE:PBI), not quite. Let us see why.
A series of overvalued metrics
For the full year 2020 the company reported $3.5 billion in revenue, a figure increased by 11% as compared to 2019. On the contrary, total revenues between 2018 and 2019 remained stagnant. This indeed can be attributed to the e - commerce boom supported by the COVID-19 induced lockdowns. Despite the double digit revenue growth, the company reported an EPS figure of $0.3, while in 2019 EPS was $0.68 and in 2018 $1.05. In other words, earnings per share decreased significantly by a cumulative 71% during the last three years. According to the 2020 annual report, the company anticipates that revenues will increase by 6 - 7% annually in the long term. In addition, in their April 2021 investor presentation, the company reported that they believe they will achieve long term EBIT margin in the ballpark of low teens. For reference, EBIT margin for 2020 was 4.2% while for 2019 was 7.2%. Looking further back, we can see that EBIT margin was at double digits in 2017 and before. As we write this article, the last known share price of the company was $8.30, which makes for a stunning 27.7 P/E ratio. Given that we are looking at a growth company, we should also check forward P/E ratio which lies at 26.2. These figures are 10.78% and 6.09% higher than the industry's median values. We moved even further and looked for the company's PEG ratio which is a massive 2.68.
We believe that we can all see that the above valuation metrics do not add up with the current share price. From the one side we have a downtrend in EBIT margins and at the other side we have a share price that is based rather on unrealistic expectations, given the numbers presented above. By taking a look from another angle, we could say that in order for the current valuation to be somewhat reasonable, earnings should grow by 12% per annum in the long term, rather than 9% which is projected now, which is also quite optimistic in our view.
Right now, estimates for Q1 2021 earnings are $0.05 per share. Given that the company is operating in a seasonal industry,we shall look at previous earnings reports in order to estimate the annualized EPS figure. In Q1 2020 the company reported $0.05 earnings per share while the figure started to ramp up at the second half of the year. Although the internet economy is here to stay, the return to normal life will have a negative impact on it, at least initially. Even if we assume that the company will report $0.30 EPS for the full year 2021, the shares are still overpriced as we wrote above.
Although the company expects revenues in its SendTech segment to remain stable or even decline a bit, EBIT margins are expected to grow to 30% or more. The SendTech segment currently represents 40% of the company's portfolio with the long term goal being 30%. So it doesn't make sense investors valuing the SendTech segment aggressively.
On the other hand, revenues attributed to the global e - commerce segment rose by 41% on a YoY basis, which justifies the hype. However, the decline in gross margin resulted in a loss of $83 million. In fact, this figure is 18.5% higher than the loss occurred in 2019 in this particular segment. The company fell victim to a ransomware attack which cost them $6 million in 2019 and was remunerated in 2020 by the relative insurance. It seems that large increases in the e - commerce, business related revenues are significantly reduced by revenue reductions in other parts in the same segment. This is also true for the other two segments of the company.
So what is the bottom line?
If someone asked be what are my thoughts on Pitney Bowes I would say this: A very nice company which happens to be there standing for 100 years. They are certainly trying to ride the online economy wave and the timing couldn't be better. However, as we wrote in the beginning of this article, the market has a tendency to overreact and this is the case with this company. In every metric, I see Pitney Bowes as overvalued. So far, it hasn't proved that it can sustain the earnings growth rate needed to justify the current valuation. It is no mystery that current price target estimates are on $4.45 mean value. In other words, there is a 46% downside from the current market value to the mean of price targets. Of course we could not be bearish on this stock as overall it is a healthy company and any stock analysis we make is for at least one year timeframe. However, with the current information, we wouldn't enter a long position on the stock above $6.50 per share which we believe will be the next major support.
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