On Aug 23, we maintained our Underperform recommendation on Piney Bowes Inc. (PBI). We appreciate the company’s better-than-expected earnings performance in the second quarter of 2013. However, the continued weakness in Production Mail and Management Services segments and decline in the Small and Medium Business Solutions (SMB) revenue streams have been a drag on the company’s revenues.
Why the Reiteration?
On Jul 30, Pitney Bowes reported second-quarter 2013 pro forma earnings per share of 52 cents, which was 15.6% above the Zacks Consensus Estimate of 45 cents. Quarterly earnings were up 1.9% year over year from 51 cents per share. Earnings for the second quarter 2012 exclude goodwill impairment charge of 40 cents, restructuring charges of 7 cents and loss of 10 cents due to discontinued operations.
Total revenue for the second quarter was $1.16 billion, down 0.7% from $1.17 billion in the prior-year quarter. The top line benefited from double-digit growth in the Production Mail and Mail Services segments. International Mailing revenues were flat year over year. This was offset by lower recurring revenues from the SMB group, lower licensing revenues in the Software segment and lower revenues due to continued pricing pressure on some contract renewals in the Management Services segment. Revenues for the quarter were below the Zacks Consensus Estimate of $1.18 million.
Following the release of the second-quarter results, the Zacks Consensus Estimate for fiscal 2013 declined 5.4% to $1.76 per share. Moreover, the Zacks Consensus Estimate for fiscal 2014 also contracted 7.7% to $1.69 per share.
The demand for postal services is experiencing a continuing decline. Digital and electronic forms of mailing have substituted for the postal services, which is a threat to Pitney Bowes’ revenues and profitability. Although Pitney has ventured into new products as an alternative to postal services, we remain skeptical about the success of these low-margin products.
In addition, the company’s free cash flow is being impacted by higher working capital requirements. Significant amount of cash ($86 million) was used for investing activities during the latest reported quarter (2Q13) compared with just $14 million in the second quarter of 2012. Cash and cash equivalents also dropped to $608.6 million during the quarter from $913.2 million in the prior-year quarter.
Further, Pitney lowered its guidance for 2013. For 2013, the company expects revenues, excluding the impact of currency, to range from a decline of 1% to a 2% increase. Revenue guidance was lowered from the previous guidance of flat to up 3%. The company expects earnings per share from continuing operations to be in the range of $1.62 to $1.77 a share, as against the $1.85 to $2.00 range mentioned previously. Free cash flow for 2013 is expected to be in the range of $575 million to $675 million compared to the previous guidance range of $600 million to $700 million.
However, Pitney Bowes has been divesting its non-profitable businesses in order to become a more focused company. Following the earnings release, Pitney Bowes announced its plan to divest its North American management services unit to Apollo Global Management for $400 million. In May, the company announced its plan to sell the management services business wing in the United Kingdom and Republic of Ireland to Swiss Post Solutions. The financial terms were not disclosed.
Other Stocks to Look For
Pitney Bowes carries a Zacks Rank #4 (Sell), which further justifies our recommendation.
Some other stocks that are performing well in the industry and worth considering at the moment are Advent Software (ADVS), Ansys Inc. (ANSS) and CommVault Systems Inc. (CVLT). All three carry a Zacks Rank #2 (Buy).
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