Pitney Bowes Inc. (NYSE: PBI) reporting recurring revenue and relationships with large established partners. In my opinion, Pitney’s technology improvements and more partnerships could mean a significantly higher stock valuation.Even taking into account the risk to regulators, I don’t think Why Pitney is trading at current prices. Based on my discounted cash flow model, a fair value could be worth $8, or even $14, depending on a few assumptions made.
Pitney’s recurring revenue
Pitney is a technology company that provides digital, physical and financing solutions to help customers send mail and packages.
Among the business segments of the company, what I think is the most interesting right now is the 65%-70% recurring revenue that SendTech is reporting. This means that 65% of the revenue reported by the SendTech segment appears to be recurring. With this in mind, it seems convenient to make a DCF model. Keep in mind that future EBITDA will likely not be very volatile:
Analysts expect sales growth and positive free cash flow in 2022 and 2023
I evaluated previous and expected sales growth, EBITDA margins, and operating margins, which I later used in my financial modeling. According to me and other analysts, Branson’s sales growth could be closer to 4.11%, its median EBITDA margin could be closer to 9.96%, and its operating margin could be closer to 5.52%. Finally, most investment advisors expect free cash flow growth closer to $142 million to $160 million:
Management’s guidance was also in line with analysts’ guidance. The company expects mid-single-digit growth in target markets, so sales growth is likely to stay close to 4%-7% in my opinion. Pitney’s long-term EBIT margin is also expected to be in the high single digits to low double digits.
Assuming more customers will notice Pitney’s API, the stock price could be between $8 and $14
With the global e-commerce industry expected to be profitable, under normal circumstances, I believe Pitney is likely to report sales growth. I’m also optimistic about Pitney because it provides an application programming interface or API. If customers are reluctant to run their own coding programs, they may experience significant efficiencies. As more customers learn about the company’s digital capabilities, Bing Neng’s sales are likely to head north:
Powered by our Shipping API, customers can purchase postage, print shipping labels, and access shipping and tracking services from multiple carriers that can be easily integrated into any web application, such as an online shopping cart or e-commerce site , with guaranteed delivery times and flexible payment options. Source: 10-K
In this basic case, I would also like more partners to use the company’s capabilities. Therefore, companies may enjoy certain economies of scale as their workload increases. All in all, I expect the company’s free cash flow margin to expand:
We are a USPS worksharing partner and national outsourcing provider of mail sorting services, allowing customers to qualify for a large number of First-Class Mail, Marketing Mail and Marketing Mail Flats and Bound Printed Matter for postal worksharing discounts. Our network of fulfillment centers across the United States and fully customized proprietary technology provide customers with end-to-end solutions from pickup to drop-off to the postal system network, expedited mail delivery and optimal postage savings. Source: 10-K
Finally, in this case, I also assume that Pitney Bowes Bank will be working with more and more clients. Keep in mind that the company offers revolving credit solutions, which are also quite lucrative for Pitney.
Through our wholly owned subsidiary, Pitney Bowes Bank (the bank), we provide U.S. customers with revolving credit solutions that enable customers to pay meter rent and purchase postage, services and supplies, as well as interest-bearing deposit solutions for those who prefer prepaid postage client. Source: 10-K
Compared to other analysts, I’m a little less optimistic, but my numbers aren’t too far from other analysts’ numbers. Under normal circumstances, I believe Pitney could achieve as much as $4.14 billion in sales in 2024.
If we also use an EBITDA margin of 9.9% to 7%, conservative depreciation and amortization, and capital expenditures of approximately $146 million, free cash flow in 2024 would be $197 million. If we discount 2023 and 2024 free cash flow to 2023 and use 7.2x final EBITDA, the implied equity would be $2.4 billion. In the end, the fair price is $14:
Note that I’m using net debt of $530 million, which excludes the company’s debt related to financing. If we add in the implied financing related to debt, the fair price of the company would be $8 per share:
New regulations and failed partnerships could lead to $4.50 per share or less
Pitney relies on multiple partnerships with large conglomerates that offer delivery services. If, for whatever reason, Pitney doesn’t maintain its relationship with these large partners, future net income is likely to decline. Therefore, if reporters notice a decline, Branca’s fair valuation and its share price may decline:
We rely on financially viable country positions in the geographic markets in which we operate, particularly the United States. A large portion of our revenue depends on the ability of these post offices (especially USPS) to provide competitive mail and package delivery services to our customers and the quality of service they provide. Their ability to provide high-quality services at affordable prices in turn depends on their continued financial strength. If these positions are unable to continue to provide these services in the future, our financial performance will be adversely affected. Source: 10-K
Pitney could suffer significant losses from late-stage U.S. regulatory changes. Note that Pitney needs regulatory approval to launch new products. If the company does not get approval from the authorities, sales growth is likely to decline. Therefore, the fair price may be lower than what I described in my previous financial model:
A significant portion of our business is regulated and overseen by positions in the USPS and other key markets. These postal authorities have the authority to regulate some of our current products and services. They also have to approve many of our new or future product and service offerings before we can bring them to market. If our new products or future products and services are not approved, subject to significant approval conditions, if regulations for our existing products or services change, or if we fail to comply with those regulations, our financial results could be adversely affected. Source: 10-K
I also simulated a pessimistic free cash flow model with sales growth of -10%, 5%, and -1.5%, and an EBITDA margin of nearly 8.5%. My results include a drop in free cash flow from about $115 million in 2021 to nearly $65 million in 2024. If we add up all the factors for a weighted average cost of capital of 5% and an EV/EBITDA multiple of 5x, the implied equity is almost $775 million. Finally, the implied price is $4.5. If we also assume implied financing related to debt, the implied stock price will be well below $1.
Pitney’s Balance Sheet
As of December 31, 2021, the balance sheet included $732 million in cash, $4.95 billion in total assets and $1.13 billion in goodwill. Given the total amount of goodwill, it is important for investors to be aware of potential goodwill impairment risks.
In 2020, the company reported an impairment of $198 million. As a result, Adjusted EBITDA equals $375 million, which could be much lower. Without the impairment, EBITDA would have been equal to $177 million.
As of December 31, 2021, total liabilities equaled $4.8 billion, so gearing equals 1x. While investors are likely to scrutinize the company’s contractual obligations, as of today, the balance sheet looks healthy.
With recurring revenue, signed partnerships with major conglomerates, and digital strategy, Pitney is very interesting right now. In my opinion, if management continues to deliver the same EBITDA margin, we are likely to see further inventory demand in the market. I do think there are some risks related to total debt and some regulatory risk. Therefore, in my opinion, the current share price does not represent the true value of the stock. I believe Pitney’s valuation has a lot of upside potential.