PBI - Pitney Bowes: UPS Strike Makes The Turnaround Story Even Stronger

2023-07-21 11:09:58 ET

Summary

• Pitney Bowes is a $670-million market cap shipping, mailing, and technology company that offers services to various clients globally.
• In recent years, things have not looked good for the firm. But the activist investor has managed to get on the board with a series of ambitious plans for change.
• Pitney Bowes seems to have the necessary resources and capabilities to handle the potential increase in shipping volume from businesses making the switch from UPS.
• Despite some risks, I believe that PBI is worth paying attention to, given the internal processes currently underway at the company, as well as taking into account the recent news about the strike by workers of one of its main competitors.

The Company

Pitney Bowes Inc. ( PBI ) is a $670-million market cap shipping, mailing, and technology company that offers services to various clients globally. It operates through 3 segments as per the latest 10-Q :

1. Global E-commerce [41.75% of total sales], which provides domestic and international parcel services and digital delivery solutions;
2. Presort Services [19.04%], offering mail sorting for postal discounts; and
3. Sending Technology Solutions [39.21%], providing physical and digital mailing and shipping technology solutions, along with financing options.

The company markets its products and services through various channels, including direct sales, partner channels, direct mailings, and digital platforms.

For several years , PBI has been in a constant margin contraction - from FY 2016 to date [TTM], gross margin has fallen from 58.77% to just 30.45%; EBIT margin shrank from 16.75% to 2.89%. The absolute EPS for the indicated period has decreased by ~90%.

The deterioration trend continued in the last reporting period [ Q1 FY2023 ]:

• Total revenue: $835 million, down 4% YoY;
• Gross profit: $278 million, a YoY decrease of 9%. [Gross margin: stable at 33% compared to last year];
• EBITDA: $73 million, a decrease of 23% compared to $95 million last year.
• EBIT: $33 million, a decrease of 38% compared to $53 million last year.
• Interest expense: $37 million, an increase from $34 million in the prior year.
• Corporate expenses: $56 million, a decrease of $1 million from the prior year.
• Adjusted EPS: a loss of $0.01 compared to $0.08 in the prior year.

Market expectations regarding the company's future look pretty depressing, taking into account recent financial results and management's track record over the past few years. We can draw this conclusion mainly from the latest EPS revisions , which have declined by 35-72% in the last 3-6 months:

Even SA's system rates PBI as a stock with a high probability of poor performance:

Because of the current justified negative sentiment surrounding PBI, the stock is priced at just 0.2 times its forward sales and only ~7.2 times its next-year EBITDA. Additionally, the forward dividend yield stands at ~5.24% , which appears high, but of course, is not safe.

By all accounts, the company seems like a story to avoid. But why do I think investors should take a closer look at the company?

The Turning Tide

There are many institutional investors in the capital structure of the company, but one of them - Hestia Capital - is very determined to change the current management of the company.

Another SA analyst, Dalius Taurus, wrote about this in more detail in his Top Idea article back in early May - I recommend everyone to read that piece - you'll find many interesting details there.

In a nutshell, Hestia Capital is a value-oriented investment firm led by Kurt Wolf that manages a long-term capital base anchored by its founder's personal wealth. During its existence, the fund has generated excellent returns of over 30% per annum and has been involved in some landmark transactions:

Hestia plans to fire current top management and put new people at the helm, each of whom has their own experience with corporate turnarounds like PBI:

On May 9 , Hestia was able to secure 4 seats on the company's board of directors, which was a turning point for the stock - as evidenced by the way the price reacted:

As of this writing, the stock is trading at $3.75/sh, which is roughly the price Hestia has used in its calculations of the company's potential fair value after a series of cost optimization and business realignment strategies begin to bear fruit:

The chart shows different scenarios of how the fair value of PBI stock will change, depending on the goals of corporate decisions made by Hestia and the company's executives in the foreseeable future. Look for the option closest to the current price - it is also the "least favorable" of all in terms of upside potential size [+62% to the last closing stock price].

The "GEC EBIT" strategy aims to bring PBI's EBIT back to the level of its competitors, which are moving away year by year:

I think this is the most realistic scenario for PBI in the medium term, which happens to coincide with the current problems of competitors in the GCE segment. ?I am talking here about United Parcel Service ( UPS ), which is facing fierce headwinds from the recent strike by 340,000 workers :

Pitney Bowes seems to have the necessary resources and capabilities to handle the potential increase in shipping volume from businesses making the switch from UPS. I expect this to have an impact on PBI's margins in Q3 and Q4, so the first Hestia scenario is now much closer to implementation .

Meanwhile, the market has not yet priced in the potential impact on PBI, as news of the strike is still very fresh. Look at the quarterly EPS revisions - 0% change in the last 30 days:

Of course, it should take much longer than 2-3 quarters to close the 11-12% EBIT margin gap [compared to peers], but the lack of a reaction from PBI to the above positive setup for the company makes the stock a Buy amid Wall Street's silence, in my opinion.

The Bottom Line

Engaging in turnaround stories, as in the case of PBI, carries a variety of risks that you should always be aware of. First, it is far from certain that Hestia will succeed in its plan to restructure the company, as the past management will certainly not give up and leave so easily. According to Hestia's presentation [mentioned above multiple times], the current executives have enough social connections and relationships with each other - I assume they will insist on their own with all their might. Second, it takes a lot of time to implement a turnaround. You need to be prepared to wait at least 2-3 years for the potential return on the current investment to bear fruit. While investors wait, PBI stock may behave unpredictably given the company's relatively small capitalization and limited liquidity in the public market.

But despite all the risks, I believe that PBI is worth paying attention to, given the internal processes currently underway at the company, as well as taking into account the recent news about the strike by workers of one of its main competitors.

The stock does not seem to have priced in the new catalyst yet, in my opinion, and its price has fallen back to $3.75/sh, making it even more undervalued given the events of the last few months. I am issuing a "Buy" recommendation this time and will wait for Q3 and Q4 to see how my thesis plays out.

Thank you for reading!

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