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John Engle
John Engle
Articles (175) 

Can This Company Turn a 20th Century Product Into a 21st Century Success?

Recent coolness may present aggressive investors with an opportunity

November 30, 2017 | About:

Stamps.com Inc. (NASDAQ:STMP), the breakout hit that delivers stamps to retail customers and large-scale clients alike via fast home or business delivery, is a stock of some heated speculation and debate. It has seen rapid revenue growth, sales and fast expansion.

Who knew stamps would be such a hot commodity in 2017?

What is this Stamps.com?

Stamps has seen massive quarterly growth over the past several years. By conventional standards, the company did not just beat quarterly estimates for EPS in the third quarter, it destroyed them, like The Dream Team shredded their opponents in the 1996 Olympics.

The company saw earnings per share of $2.57, blowing away the consensus estimate of $1.42, an almost 82% overperformance. That is huge. It is significant because Stamps.com is seeing massive revenue and earnings growth rates that do not look set to fade anytime soon. It has strong customer channels, new exciting opportunities and continues to dominate in its sector – all signs this very attractive growth could continue.

Selloff looks a tad overdone

So why was there a massive selloff when earnings were reported at the beginning of the month? Great question. This can only be explained by overly zealous buyers doing too much and going too far. A bit of overexuberance may have sent the price up a tad too much. Despite a quarter that any CEO would dream of, Stamps’ stock fell 20%, losing a large amount of its market share and losing stockholders' hard-earned gains.

But the recent pullback presents a potential opportunity for investors interested in high-growth – if not bargain basement - plays. At $200, Stamps was looking a bit dear. Below $170, shares look like an interesting opportunity.

Growth is the name of the game

Stamps is an EPS success story. According to Nasdaq’s stock tracker, the company has beaten estimates four quarters in a row, posting EPS of $2.48 in fourth-quarter 2016 versus expectations of $1.84; $1.20 versus $1.04 in the first quarter; $1.69 versus $1.33 in the second quarter and, most recently, smashing expectations by over 80% with $2.57 EPS in the third quarter. The company has also seen strong EBITDA growth, currently sitting at a very healthy non-GAAP adjusted $56.6 million – up 24% compared to the third quarter of 2016. Finally, in the most recent quarter, Stamps saw net income of $46.2 million, up a whopping 148% from $18.7 million in the prior-year quarter.

There is clearly a strong trend, but will it continue? There are reasons to believe it will. In addition, the fourth quarter could be even stronger than the third thanks to the holiday season rush to send cards, gifts and goodies. Stay tuned for the fourth-quarter earnings announcement.

An unlikely success story

A company like Stamps.com is hardly the the success story one would expect to see in this era of massive tech companies growing at scorching rates and as conventional government postage faces stiff competition from the likes of UPS (NYSE:UPS). But the numbers do not lie and Stamps is a strong, healthy company with robust growth.

And that strength goes beyond financial metrics. Take user base, for instance. The company encourages users to become members and, thus, creates memberships that award loyalty and push for repeated use. The company reported 736,000 members as of the end of the third quarter, up 13% from 2016. That is a promising sign for the future when coupled with the fact Stamps’ online sales to high-volume customers rose over 30% and continues to rise. With management focused on continuing to dominate among both new and existing high-volume clients, the company looks poised to see more growth and more earnings. Stamps is gobbling up competition like a Thanksgiving turkey, positioning itself for the future.

Also, as of recent reports, Stamps is expanding beyond its niche focus on stamps and shipping, offering its larger, less retail-based clients new services, including management software and capabilities focused on customer relationship and inventory. The company is aiming to become these big clients’ one-stop shop for many of their varied needs, while not losing focus on what made them profitable in the first place.

Sure, the world shipping market could potentially cool off or instability within the U.S. Postal Service could cause issues, but those seem to be further off, longer-term concerns for Stamps' management to grapple with. In the near future, their focus is, and we argue should be, on developing further channels to lucrative business partners.

The stock is down, but do not expect sales, earnings or income to be down. With the recent cool-off, now might be a decent entry point for investors eager to ride this growth story.

Disclosure: I/We own no stocks mentioned in this article.

About the author:

John Engle
John Engle is President of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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