Stocks are floating up. But, there’s an ephemeral feeling like we just woke up, the planet hasn’t been destroyed… so let’s get brunch. I know a place in the clouds that serves delightful optimization solutions.
I’m gonna be frugal, stay in my kitchen and cook up a basic broth from some discarded bones. Pitney Bowes (PBI) was once a blue-chip staple of both corporate offices and investment portfolios providing postage and shipping services. It seemed well-positioned to take advantage of the Internet and the potential rise of e-Commerce.
But, PBI remained dependent on general mail as e-commerce took longer to grab a foothold and by the time the packaging of delivery retail boomed, the competition had changed the landscape. The stock has been in a long and brutal decline since the 1999 peak.
This year, the stock price of PBI has dropped by 34%, while in the past three years it has lost more than 79%. The stock is trading at the lowest level since the 1980s and is currently valued at $704 million from a high of more than $19 billion in 1999. As a result of the recent declines, the company’s PE on this year’s estimated earnings is just 4.16x, which is much lower than the 16.5 of the S&P 500.
The list of problems includes: volume of mail declining as people switched to email and other forms of communications. Tools like Docusign (DOCU) have made it easy for companies to use digital signing tools, which cost less than the traditional mail.
Second, the company recently slashed its dividend to 5 cents from the previous 18.25 cents.
Third, the current trade war will likely lead to more pain for the company because it could lead to less cross-border transactions forcing the company to lower estimates.
That’s a fair amount of bad news built into the stock. But, PBI now has a new opening to service small and medium business e-commerce in an integrated fulfillment as startups are viewing Amazon (AMZN) as a competitor and want to control their own process.
Other shifts include major shippers like FedEx (FDX) are cutting ties with AMZN and Stamps.com losing its exclusivity with the U.S. Post Office.
There is a window for PBI to step in and make up for lost time and opportunity. It has sold some non-core business to shore up its balance sheet and focusing growth sectors.
It’s very early in the turnaround process but looks promising and with the next earnings report is Nov. 5th and I think the company can show it is taking traction. The chart looks like it’s now building a base; it had a big reversal following the last earnings reports on 8/25, held the low and is now consolidating above the $4.00 support level.
I’m buying some calls outright, specifically the Nov. (11/15) 4 Calls for $0.70 per contract. My expectations is the stock can get back to the $6 level, which would make the calls worth $2 or a 180% return. I would look at a longer-term position.
If the company whiffs, I’m only out $70 per contract and will put the stock on the way back burner.
PBI shares were trading at $4.53 per share on Tuesday afternoon, up $0.07 (+1.57%). Year-to-date, PBI has declined -20.87%, versus a 21.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Option Sensei
Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...
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