Looking at a year-to-date price chart of Stamps.com Inc. (STMP, Financial), you might think you were looking at a profile of peaks and valleys in the Rockies or Alps:
For the past five years, the stock price has exhibited similar volatility, with all sorts of triggers. The most recent was President Trump’s unexpected announcement he was ordering a review of the United States Postal Service's finances. That news caused the stock to drop nearly 10%; it has now nearly regained that lost ground.
But behind the ups and downs is a company that has many good qualities and the potential for strong capital appreciation.
Stamps.com was the first company to be authorized by the U.S. Postal Service to use software to print stamps in 1999. The idea of avoiding trips to the post office was immediately popular, especially among small businesses.
The company built on that platform and now has several subsidiaries that cater to associated niches. They include: Endicia, ShipStation, ShipWorks and ShipEasy. Its solutions also allow its customers to ship via other carriers, including UPS (UPS, Financial) and FedEx (FDX, Financial). Its customers include individuals, businesses of all sizes, e-commerce merchants and warehouse shippers; included in that list are high-volume printing and distribution companies.
Revenue is generated in five ways:
- Subscription plans.
- Postal Service compensation.
- Customer purchases of stamps and labels.
- Sales through integration partners.
- Miscellaneous compensation.
Stamps.com, then, has found and expanded a niche that allows its customers to save time (and even money in the case of discounted postage).
To determine whether this company will serve the needs of investors, we turn to the Macpherson model, which was developed by Thomas Macpherson. This screen is only an initial scan; investors considering buying should perform further due diligence.
Criteria for the model are divided into three sets: financial strength and growth, strength of the moat and valuation. Data in the tables were current at the close of trading on April 17.
The first set delivers two solid passes and two weak passes:
The weak passes: Stamps has $1 million in long-term debt, which is nearly trivial when compared to the $183.5 million in cash at the end of fiscal 2017. Return on capital comes in at 14.95%, just a small fraction below the 15% threshold. Investors with stricter standards or a lengthy list of candidates may count the company out at this point.
Does the company have a competitive advantage, a moat that will allow it to maintain its pricing power? That question gets an initial answer in this table:
The third set provides valuation estimates through two forms of discounted cash flow analysis: free cash flow-based and earnings-based.
The GuruFocus system says Stamps.com is more suitable for earnings-based valuation, so it should be given more weight than the free cash flow valuation. Thus, we will consider the company’s stock to be overvalued.
Other financial data:
- Revenue: Strong growth, with average annual increases of 41.6%. It also has predictable growth thanks to its subscription base.
- Margin: The operating margin was 34.88% in 2017 and has grown over the past decade.
- EBITDA: The average growth rate of this measure has averaged 78.7% over the past three years.
- Dividends: Stamps.com does not pay a dividend.
- Buybacks: The company has not bought back shares in the past three years, and a negative share buyback ratio indicates it has been issuing new shares.
The company's beta is -0.63. This five-year chart, with the Stamps.com share price in green and the SPY (an exchange-traded fund representing the S&P 500) in blue, shows the relationship between the two:
Seven of the GuruFocus gurus have positions in Stamps.com: Stanley Druckenmiller (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have the biggest positions. Druckenmiller holds 168,000 shares, while Royce and Greenblatt hold 57,137 and 40,810 shares respectively.
Of the 10 trades made by gurus in the fourth quarter of calendar 2017, five were buys or adds, while the other five were reduce or sell out.
Institutional investors own 99.48% of the shares outstanding, while insiders own another 14.54%, indicating institutions are likely short as well as long (the shorts hold 16.46 million shares, for a short ratio of 5.93).
The analysts followed by NASDAQ.com are bullish:
Their consensus price target for the coming 12 months is $240, an 11% increase over the closing price of $216.40 on April 17.
The outlook for the next three to five years appears to be strong. In its Feb. 2Â company presentation, Stamps.com offered these “Key Investment Takeaways”:
In its guidance for 2018, the company said it expects:
- Revenue to range between $530 million and $560 million, compared to $468.7 million in 2017.
- Net income to range between $138 million and $153 million, compared to $150.6 million in 2017.
- Net income per fully diluted share between $7.09 and $8.04, compared to $8.19 in 2017.
Conclusion
Value investors looking for strong growth may keep Stamps.com on their wait and watch list. Those who look for slow and steady growth will want to look elsewhere.
The company has a history of strong growth and most of its metrics are robust. However, it is overvalued according to earnings-based DCF, the discounted cash flow measure that counts here.
While not for patient value investors, Stamps.com could be a very attractive name for investors willing and able to use options. Put options, combined with a stock purchase to create married puts, could protect the downside while opening the door to capital appreciation. Alternatively, they might use straddle or strangle option sets to extend their opportunities on both the upside and downside.
Volatility, like that shown by Stamps.com, is fine for those who use options or even those who are willing to be tossed up and down, in the reasonable expectation the stock price will increase over several years.
Given that volatility, it’s quite possible the stock will experience another plunge, creating a potential buying opportunity.
Disclosure: I do not own shares in any of the companies listed, and do not expect to buy any in the next 72 hours.
