February 03, 2015 Pitney Bowes Inc. (PBI-NYSE) Analyst Note Current Recommendation Prior Recommendation Outperform Date of Last Change 05/01/2014 Current Price (02/02/15) $22.26 Target Price $23.00 NEUTRAL SUMMARY Pitney Bowes reported fourth quarter 2014 adjusted earnings per share that matched both the Zacks Consensus Estimate and the year-ago result. While weakness in the Small and Medium Business Solutions and Enterprise Business Solutions segments remained the headwinds, the company s Digital Commerce Solutions segment again posted a strong performance. Also, the balance sheet is improving with rising cash and decreasing long term debt. However, revenues were down on a year-overyear basis due to two weak performing segments. In addition, stiff competition remains a matter of concern. Hence, we remain Neutral on the stock. SUMMARY DATA 52-Week High $28.18 52-Week Low $21.73 One-Year Return (%) -8.23 Beta 1.44 Average Daily Volume (sh) 1,357,586 Shares Outstanding (mil) 201 Market Capitalization ($mil) $4,474 Short Interest Ratio (days) 15.29 Institutional Ownership (%) 87 Insider Ownership (%) 1 Annual Cash Dividend $0.75 Dividend Yield (%) 3.37 5-Yr. Historical Growth Rates Sales (%) -7.1 Earnings Per Share (%) -4.2 Dividend (%) -16.7 using TTM EPS 11.7 using 2015 Estimate 11.0 using 2016 Estimate 10.0 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Large-Growth Industry Office Auto&Eqp Zacks Industry Rank * 243 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 1,167 A 1,158 A 939 A 1,031 A 3,869 A 2014 937 A 958 A 942 A 984 A 3,821 A 2015 994 E 1,016 E 998 E 1,043 E 4,051 E 2016 4,566 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.42 A $0.52 A $0.49 A $0.53 A $1.88 A 2014 $0.42 A $0.46 A $0.51 A $0.51 A $1.90 A 2015 $0.45 E $0.49 E $0.54 E $0.54 E $2.02 E 2016 $2.22 E Projected EPS Growth - Next 5 Years % 6 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS Pitney Bowes Earnings In-Line on Digital Commerce Business Feb 02, 2015 Pitney Bowes reported fourth-quarter 2014 adjusted earnings per share from continuing operations of $0.51, which came in line with both the Zacks Consensus Estimate as well as the year-ago quarter figure. Profits during the quarter were driven by strength in the Digital Commerce Solution business. For fullyear 2014, adjusted earnings per share from continuing operations came in at $1.90, which was higher than the prior-year figure of $1.81. Inside the Headlines Total revenue for the quarter was $984 million, down 3% from year over year, on a reported basis. The top line primarily benefited from strong performance of the Digital Commerce Solutions segment, largely offset by weakness in Small and Medium Business (SMB) Solutions and Enterprise Business Solutions segments. For full year 2014, revenues increased 1% year over year to $3.8 billion, on a reported basis. As per the segment groups, in fourth quarter 2014, SMB Solutions group s revenue slipped 7% year over year to $510 million and Enterprise Business Solutions segment revenues dipped 4% year over year to $249 million. Nevertheless, Pitney Bowes Digital Commerce Solutions segment again performed well, with a 12% year-over-year increase in revenues to $225 million. Income from continuing operations was $96.7 million in the quarter, compared with $105.7 million in the prior-year quarter. Meanwhile, free cash flow for the quarter stood at $154 million. The company disbursed $38 million for dividends. Liquidity Exiting the year, the company s cash and cash equivalents totaled $1,079 million, up from $907.8 million as of Dec 31, 2013. Long-term debt decreased to $2,927 million as of Dec 31, 2014 from $3,346 million as of Dec 31, 2013. Shareholders equity was $77.3 million compared with the prior-year figure of $205.2 million. 2015 Outlook Pitney Bowes expects its GAAP earnings per share from continuing operations to be in the range of $1.85 $2.00. VALUATION Pitney Bowes current trailing 12-month earnings multiple is 11.7x compared with the 11.2x average for the peer group and 18.3x for the S&P 500. Over the last five years, the company s shares have traded in the range of 5.2x to 14.5x trailing 12-month earnings. Our Neutral recommendation on the stock indicates that it is expected to perform in line with the broader market. Our target price is $23.00 or 11.4x 2015 EPS, which is above the historical range. Equity Research PBI Page 2
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Pitney Bowes Inc. (PBI) 11.0 10.0 6.0 7.0 11.7 14.5 5.2 Industry Average 12.4 10.8 4.6 5.9 11.2 18.4 6.8 S&P 500 15.9 14.9 10.7 15.0 18.3 19.4 12.0 Konica Minolta, Inc. (KNCAY) 13.8 12.3 7.5 5.8 14.1 16.5 8.8 Seiko Epson Corp (SEKEY) N/A 6.3 5.3 8.5 1.5 Lexmark International Inc. (LXK) 11.0 10.1 N/A 4.8 9.8 12.2 4.1 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Pitney Bowes Inc. (PBI) 17.8 440.3 17.5 171.4 10.7 3.1 9.5 Industry Average 4.6 4.6 4.6 43.4 1.8 2.5 6.1 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research PBI Page 3
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research PBI Page 4
OVERVIEW Pitney Bowes Inc. (PBI) is one of the largest providers of mail processing equipment and integrated mail solutions across the world. It offers a full suite of equipment, supplies, software and services for end-toend mainstream solutions, which enables its customers to optimize the flow of physical and electronic mail, documents and packages across their operations. Pitney Bowers has seven business segments classified into two groups based on customers served by it, in order to provide a better outlook of its business. Pitney Bowes two reporting groups are called Small and Medium Business (SMB) Solutions and Enterprise Business Solutions. The SMB Solutions group consists of the company s global Mailing operations. This group has two business segments: U.S. Mailing and International Mailing. U.S. Mailing: The segment includes the U.S. revenue and related expenses from the sale, rental and financing of mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions. International Mailing: The segment includes the non-u.s. revenue and related expenses from the sale, rental and financing of mail finishing, mail creation, shipping equipment and software; supplies; support and other professional services; and payment solutions. The Enterprise Business Solutions group includes the company s global Production Mail, Software, Management Services, Mail Services and Marketing Services operations. Recently, in Oct 2013, the company divested is Pitney Bowes Management Services (PBMS) business as a part of its transformation strategy. Production Mail: The segment includes the worldwide revenue and related expenses from the sale, financing, support and other professional services of high-speed, production mail systems and sorting equipment. Software: The segment includes the worldwide revenue and related expenses from the sale and support services of non-equipment-based mailing, customer communication and location intelligence software. Mail Services: The segment includes presort mail services and cross-border mail services. Marketing Services: The segment includes direct marketing services for its targeted customers. Its products and services are marketed through an extensive network of direct sales offices in the U.S. and through a number of its subsidiaries and independent distributors and dealers in many countries throughout the world. It also uses direct marketing, outbound telemarketing and the Internet to reach its existing and potential customers. It sells to a variety of businesses, governmental, institutional and other organizations. It has a broad base of customers, and it is not dependent on any one customer or type of customers for a significant part of its revenue. It does not have significant backlog or seasonality relating to its businesses. Equity Research PBI Page 5
REASONS TO BUY Pitney Bowes has undertaken a strategic transformation process designed to create long-term flexibility to invest in future growth. The company continues to realize the benefits of its ongoing actions to improve its infrastructure, productivity and profitability. The company benefited from its novel business model, incorporated in May 2013, as evident from the overall revenue increase and EBIT improvement in the company. The EBIT continued to improve in the quarter even after having increased investment growth initiatives. As a part of its transformation process, the company has shifted its shipping business to the digital commerce from SMB solutions for improved alignment of its segments. Pitney Bowes continues to move forward with its long-term strategies to enhance value. The company s digital commerce business is performing impressively well driven by the increased demands for the e-commerce solutions. In the third quarter, the company saw a 26% growth in this business while its e-commerce solutions alone grew in double digits over the last quarter. Growth in the company s software license and marketing services businesses also contributed to the segment s performance in the third quarter 2014. The company has aligned its priorities to the potential of this $40 billion market. The company s diligent operational execution is leading to working capital improvements while enhancing its cash and balance sheet positions. The company is also focused on stabilizing its mailing business by taking strategic marketing initiatives like its go-to-market strategy designed to enhance its software business. Moreover, the company is also initiating an ERP system to integrate its back office operations. In the first quarter of 2014, the company had invested $5 million for implementing the ERP system. The company s North American Mailing business in the U.S. continued to benefit from its go-to-market strategy. The company has been focused on streamlining its business by divesting its non-core businesses. Going forward, the company intends to tap the opportunities in its core business like its digital commerce business which has immense growth potential. The company also intends to reduce its debt including bank term loans from the proceeds of such transactions. REASONS TO SELL Most of the company s revenues are directly or indirectly subject to regulation and oversight by the USPS (United States Postal Service) and foreign postal authorities. It also depends on a healthy postal sector in its operating regions, which could be influenced positively or negatively by legislative or regulatory changes. The U.S capital and credit markets have been experiencing extreme volatility and disruption. Recently, the volatility and disruption have reached unprecedented levels. In some cases, the markets have exerted downward pressure on stock prices and credit capacity for certain issuers. Under further deteriorating market conditions, there may an acute problem with the company s liquidity. Pitney Bowes has been divesting its non-profitable businesses in order to become a more focused company. Recently, it completed the divesture of its management services business. After a thoughtful consideration, management at Pitney found these businesses failing to complement its existing line of businesses. This divesture is likely to have a negative impact on the company s cash flow going forward. Equity Research PBI Page 6
The demand for postal services is experiencing a continuous decline. Digital and Electronic substitutes for mailing have resulted into a threat for PBI s revenues and profitability. Also recently transportation of biological or chemical products is being considered as terrorism. Although Pitney has ventured into new products as an alternative to postal services, but success with these low margin products still remains a question. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of PBI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1136 companies covered: Outperform - 16.5%, Neutral - 76.8%, Underperform 6.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research PBI Page 7