PBI - Pitney Bowes: Hold Better Days Are Approaching

2023-07-21 06:26:53 ET

Summary

• Pitney Bowes Inc. is facing performance decline due to geopolitical tensions disrupting supply chains but is aligning for long-term prosperity with its ParcelPoint Smart Locker solutions expansion and a contract with the US Navy.
• The company's ParcelPoint Smart Locker product suite offers secure, efficient, cost-effective, and customer-friendly package delivery and storage, which is expected to attract many clients.
• Despite the company's promising innovations, its dividend policy is currently unreliable and unsustainable in the long run, leading to a recommendation to hold until its financial situation improves.

Investment Thesis

Pitney Bowes Inc. (PBI) is a multinational shipping and mailing corporation. The company offers small and medium-sized businesses and major corporations technological, logistical, and financial services. Generally, the company's performance has been declining, as exhibited by declining growth metrics, negative EPS revisions, and declining share prices TTM and YTD.

I attribute this weakening performance to the cross-border headwinds . However, despite these challenges, the company is aligning itself to long-term prosperity, as exhibited by its parcel point smart locker solutions expansion. Further, its contract with the US Navy, in my view, will be a significant growth catalyst. I believe given these growth levers; the company will turn its fortunes around. My optimism can be supported by the increasing insider buying, which is mostly associated with the onset of positive developments.

Cross-Border Headwinds

As a result of rising geopolitical tensions , several countries have begun to isolate themselves and grown less trusting of one another. This caution is warranted regarding the supply chain, as an escalation of hostilities could disrupt vital resources and major trade routes. As a result, policymakers and business moguls are investigating the feasibility of achieving material and industrial independence within the country. Instead, they hope to establish 'friend shoring' partnerships, which involve establishing economic ties with countries that share similar values and are likely to be located close by ('nearshoring'), so ensuring a more reliable supply of commodities.

Six out of ten international businesses worry that geopolitical unrest will harm their supply chains within the next three years. This shows how internal shipping volumes may be adversely affected. PBI has taken a hit due to rising geopolitical tensions that are disrupting supply chains. The MRQ saw a fall of 17% Y/Y in global e-commerce sales to $348 million, a decrease of 1% in Presort services to $159 million, and a decrease of 6% in SendTech Solutions sales to $327 million.

Growth Levers

Despite global obstacles, PBI is launching initiatives that I believe will allow it to capitalize on both the thriving domestic market and the global market. Here are the two recent changes that I anticipate will boost the company's performance.

1. Expansion Of ParcelPoint

PBI announced two critical enhancements to its ParcelPoint Smart Locker product suite: Outdoor Smart Lockers solutions and Workplace Day Use features. In today's dynamic hybrid work and educational environments, these solutions meet the rising demand for safe, secure, and flexible parcel and storage management.

The growing ParcelPoint Smart Locker suite helps colleges and institutions deal with the increasing number of shipments and reflects the changing hybrid work/life model that emerged after the pandemic. Safe, secure, and convenient, ParcelPoint Smart Lockers enable dependable point-to-point package and asset management for various sectors through various business models.

I believe many clients will adopt this innovation because of the following benefits attributed to smartlocker.

Security: Smart lockers offer superior security. It protects parcels and valuables with biometric verification and camera surveillance. Businesses that handle sensitive or high-value items need this level of protection to reassure consumers and employees.

Efficiency : Smart lockers automate package delivery and storage, eliminating manual labor. Employees can focus on more critical activities with less human error. Smart lockers can also be combined with inventory management software and point-of-sale systems to improve efficiency.

Cost-effective: Smart lockers also save businesses money. Businesses can cut personnel and shipping costs by automating package handling and delivery. Smart lockers are cost-effective for developing firms since they automate activities without increasing labor.

Better customer experience: Smart lockers make package pick-up easy and secure, improving customer satisfaction. Customers can pick up their packages at their convenience without waiting in a queue or being present for delivery. This level of service boosts customer happiness and loyalty.

Systems integration: Smart lockers can readily interact with inventory management and point-of-sale systems. It improves delivery management and inventory tracking with this seamless connectivity.

2. Contract With US Navy

PBI stated in May that the United States Navy had selected its Pitney Bowes ParcelPoint Smart Lockers to aid in the service's new package distribution model. Pitney Bowes has been awarded a 7.4 million dollar contract by the United States Navy to employ its FedRAMP solutions, which include intelligent lockers, to aid in the worldwide delivery of packages.

The United States Navy plans to implement Pitney Bowes ParcelPoint Smart Lockers to streamline and improve internal mail delivery over the next few years. Sailors can use the integrated smart lockers as a free and safe mailbox around the clock. The automated system notifies them through e-mail when a shipment is ready for pick-up, eliminating any guesswork involved in the tracking process.

This contract is a testament to the lucrative deals PBI may land due to their improved service delivery through the developments discussed in the preceding section. Given the benefits of the new innovation, I believe this contract will be one of the many that are about to come. I believe PBI has just launched a real game changer to its revenue generation innovations.

Insider Transactions: Signs Of Positivity

Growing insider buying appears to confirm that PBI has a bright future contingent upon recent improvements made by the company. In the past twelve months, insider Carl Grassi bought $104,000 worth of shares at an average price of $4.18 per share. This suggests that the insider wanted to buy shares even though the price was greater than the current price of US$3.82. I suppose he did so because he was optimistic about the firm. Insiders' purchase of shares at prices greater than their current market value makes me believe the company is a solid investment.

Intriguingly, insiders have spent a total of $166,428.86 buying shares in the company over the past year, while they have sold none. With the recent transactions, insider ownership has increased to 5.2%, a healthy level that shows insiders are aligned with shareholder interests.

Dividends: Sustainability And Safety

The most recent dividend payment of $0.05 yields 6.7% and is a welcome addition to investors' gains. A high return for a few years won't mean much if the payments can't be maintained over the long term. The dividend was not covered by earnings in the most recent period, but the company had sufficient cash flow to support future payments. The dividend represents a net cash outflow, but I believe this is a more relevant indicator of dividend sustainability than traditional profitability metrics.

Over the coming year, earnings are expected to increase by 93.9%. If dividend growth continues at its current rate, the payout ratio could reach 160% in 12 months, stressing the balance sheet. The company has paid dividends for 33 years, although its record isn't fantastic due to dividend cuts. The dividend has decreased from $1.50 per year to $0.20 per year since 2013. In that period, dividends paid out fell by 87%. In my view, renters, the safety of this company is very weak, especially when its performance has been weakening.

Given the declining dividend payments, I need to see whether there are any bright spots. The company's EPS has dropped about 47% yearly over the past five years. Dividends suffer from significant earnings per share declines. If earnings decline enough, conservative payout ratios can be threatened. Earnings are expected to rise next year, but I remain cautious until a track record is established.

To sum up, I don't see a lot of growth potential, and the payments haven't been consistent, but cash flows fully cover the dividend, so that it might be reliable in the short term. If you plan to rely on the dividends from this investment, I would advise some caution.

Conclusion

PBI has dropped in performance recently, which can be attributed to the cross-border headwinds. However, its recent innovation is very promising and can dramatically turn its financials. This can be affirmed by the deal it landed with the US Navy.

However, until its performance starts improving, I remain reserved on investing here, given the unreliable and unsustainable dividend policy in the long run. As a result, I rate the company a hold until its financial situation improves.

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