JHVEPhoto/iStock Editorial via Getty Images
It’s been about a year and a half since I first wrote that there is significant value within the SendTech and Presort segments at Pitney Bowes Inc. (NYSE:PBI) and that the global e-commerce segment was dragging the company down. Since then:
- Hestia Capital spearheaded a proxy contest to make significant changes in the management team and board, the details of which are very well covered at this point.
- Hestia won 4 of 9 board seats at the 2023 annual meeting.
- Former CEO Marc Lautenbach stepped down while Jason Dies, who primarily oversaw the SendTech Solutions and Presort segments, was appointed interim CEO.
- There was another board change in which Mary Guilfoile stepped down as chair and Bill Simon and Jill Sutton were added as independent members.
- The company entered into a cooperation agreement with Hestia, completely solidifying Hestia’s influence on the business.
The stock is also up 35% since that point. It’s impressive to see what has happened in such a short amount of time even if it’s easy to be frustrated by the fact that plenty of value remains to be unlocked for shareholders.
In fact, all of these changes have yet to lead to substantial improvements in the company’s financials. I think this may have bifurcated the shareholder base which now has two main types of investors. One type sees the story above, is betting that the value in the profitable segments will be unlocked, and sees a stock trading at between 4-5x normalized FCF. The other type is looking at the company’s financials at face value and is seeing a stock that is trading at about 36x management’s guide for FY2024 FCF with no growth and high debt.
Whichever story prevails will be determined by the board’s ability to realize this “hidden” value. This remains uncertain. One thing that I am a bit more certain of is that the market won’t give the company the benefit of the doubt. Pitney Bowes sources most of its revenue from services associated with the USPS, a declining business that does not attract capital or interest from investors. Due to this, I don’t expect the stock to re-rate or trade based on best-case scenario financials.
In Greenlight Capital’s Q4 2023 investor letter, David Einhorn wrote that his fund has adopted an even more disciplined approach to value which involves getting paid directly by issuers as opposed to relying on other investors to revalue the stock. He elaborates on this and says, “with the decimation of the active fund management industry, we don’t believe we can reasonably expect securities to be re-rated by investors who are actively trying to figure out what they are truly worth.” I don’t agree that this is the best way to invest, but I do think that this reflects the situation for Pitney Bowes. The stock likely won’t rise until the value begins to show up in the financials and the board returns capital to shareholders at a rate that is in line with the cash being generated in this best-case scenario. Given my estimate of normalized earnings, the potential capital returns to shareholders could be 3-5x what they currently are.
Despite these uncertainties, I remain bullish on the stock with a long-term price target of $10 based on an assumption of $150-$200 mm of normalized levered FCF and a 10x multiple.
FY2023 Update and Recent News
This felt like a “kitchen sink” quarterly update as management took an impairment charge on GEC assets and guided to ~$25mm in FCF for FY 2024. Additionally, they provided little details about the performance of each segment and did not elaborate during the Q&A portion of the call. This should lower investors’ expectations heading into the new year and sets the company up nicely to surpass those expectations especially as cross-border comps normalize after Q1 2024, but also makes the outlook more pessimistic and casts doubt on the turnaround effort.
SendTech revenue fell 5% yoy for the full year and 4% yoy in Q4, while EBIT increased 1% for the full year and 7% in the quarter. These results were largely expected given the dynamics at play with less equipment sale revenue and more equipment lease renewals which lowers revenue and raises margins. Guidance for FY2024 was underwhelming as revenue and EBIT for the segment are expected to decline.
Starting this quarter, GEC’s digital shipping business will be moved out of GEC and into SendTech. Management indicated that this segment represents 3% of GEC revenue, putting it around $40-$45mm of revenue. They did not comment on the profitability of this segment, but that will be evident with restated financials in the upcoming 10-K. It will likely have a high gross margin but a low operating margin as they spend to scale.
Presort revenue grew 3% yoy in the full year and 3% in Q4. Segment EBIT grew 35% yoy in the full year and 17% yoy in the Q4. This remains the highest quality operating segment within the business as earnings will be able to grow over time through price increases and acquisitions which will offset the secular decline of first-class mail volume.
GEC revenue declined 14% yoy for the full year and 7% yoy in Q4. Segment EBIT declined by 33% for the full year but rose 14% yoy in Q4, although it is still unprofitable. Cross-border sales declined $49mm, meaning domestic parcel revenue grew $21mm in Q4. Given domestic parcel gross profit increased by $3mm, the incremental gross margin for domestic parcel was 14.3%. This indicates some improvement, but this gross margin remains well below competitors in the logistics industry.
This is all within the context of a logistics industry with too much capacity which is causing declining revenue per piece. This industry pressure, along with continued poor performance in the cross-border segment, is creating less optimism for the prospects of a successful turnaround. This was further cemented by the vague guidance that only called for revenue and EBIT to improve in FY2024 for the segment.
Outside of segment results, the yoy increase in unallocated corporate expenses was surprising to me. While there was commentary about wage increases offsetting cost cuts, perhaps the new board and management team are finding it more difficult than previously thought to find cuts in these expenses.
FY2023 Segment Results (Q4 Press Release)
These results did nothing to please any Pitney Bowes investors. On one side, the guide for ~$25mm in free cash flow in FY2024 left more to be desired by the camp that is looking at results at face value. For example, going into the quarter, one sell-side research company estimated a free cash flow of $68mm in 2024. Estimates and their price target for the stock were lowered substantially following these results.
For the camp that is looking at the potential value of the business without the losses of the GEC segment we are given no updates on plans to sell the segment and focus on the others, and in fact, it seems that management is focused on turning the segment around rather than selling it.
I recommend that investors don’t lose sight of the speed at which things have already changed at Pitney Bowes. The most recent results may indicate a continuation of the status quo, but all language from management indicates that they are moving with speed to turn the business around and unlock all value. I maintain a longer-term $10 price target based on $150-$200mm of normalized free cash flow without the GEC segment, a 10x multiple, and 175mm shares outstanding.
Final Thoughts
This quarter did not provide many reasons for optimism for any group of investors. Investors focused on next year’s consolidated earnings based on the guidance provided are disappointed to see guidance for only small improvements in profitability and a lack of detail in the GEC guide. Investors who are focused on the potential value of the SendTech and Presort segments are disappointed in the lack of commentary on a potential sale of the GEC segment.
My read is that the new board is thinking a bit more long-term than most investors are, despite their language about searching for quicker paybacks on investments. This is admittedly a low bar, but the difference between focusing on quarterly results versus yearly results makes a big difference in perspective. A look back at the changes over the past 18 months shows how much is changing underneath the surface of the business. I expect similar amounts of change over the course of the next 12 months.
I remain bullish on the stock with a $10 price target based on $150-$200mm of normalized free cash flow without GEC, a 10x multiple, and 175mm shares outstanding.
