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Lick the Market Blues with Stamps.com
By Michael Brush
Exclusively for InvestorIdeas.com
March 06, 2008
The U.S. post office keeps raising rates. But that hasn’t helped Stamps.com (STMP), an Internet-based service that allows customers to print stamps for a monthly fee.
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Its stock just keeps getting cheaper.
Stamps.com shares are down 70% since the spring of 2006 – when investor enthusiasm for a service allowing consumers to print postage showing off photos of their children and pets helped drive the shares to nearly $40.
Since last December alone, the stock is off nearly 25% to trade recently for $9.50 a share.
Down here, I think the stock looks pretty attractive by many measures.
- First off insiders – the chief executive, the finance chief and the marketing chief – just plowed over $1 million into the stock at around $9, or not far below current levels.
- Next, the stock trades for about eight times earnings, after you strip out all the cash. That’s cheap for a company that thinks it can grow revenue and earnings at 15%-20% a year in the medium term.
- Speaking of cash, it has about $88 million or over $4 a share. Debt: zero.
- The company also has operating losses in can carry forward to save about $95 million in taxes.
Why has the stock been hammered? That bet on vanity stamps didn’t work out. The novelty wore off, and competitors like Zazzle came on the scene with lower prices. Thanks in part to weak vanity-stamp performance, revenue was off 4% in the fourth quarter compared to a year ago. The number of customers was actually up, but average spending was down.
So what is the game plan now that justifies a cool $1 million bet by insiders? Here’s a look.
- First, the company is refining its marketing focus to attract customers who are more profitable because they stick around longer and spend more.
- Next, Stamps.com is taking steps to try to win over more small businesses and people who work in home offices. For example, it’s revamping subscription offerings so that multiple users can access a single account. This may seem like a small change, but it could bring bigger growth by expanding the Stamps.com potential customer base beyond companies with five employees or less. “The fact that we haven’t had this capability historically has limited our ability to successfully attract larger businesses,” said chief executive Kenneth McBride in most recent conference call. The company estimates that its new “multi-user” service plans rolling out this quarter will increase its potential market by 33%. It will also help Stamps.com keep customers who grow beyond a small number of employees.
- Stamps.com is also revamping its website, and working on distribution partnerships with companies like Apple (AAPL), Google (GOOG), Hewlett-Packard (HPQ) and Adobe Systems (ADBE).
The company thinks these changes could help it bring in between $80 million to $90 million worth of revenue next year, compared to $85.8 million last year. But since customers may stay with the company longer, medium-term revenue growth should come in at 15%-20% a year, compared to 8% in the second half of 2007 and 1.6% in the first half.
Impact of a slowdown
But won’t the economic slowdown hurt business? Investors seem to think so, given how they’ve sold the stock down. Small businesses tend to fare worse in slowdowns.
But McBride doesn’t agree this will be the outcome. “Some small businesses may struggle more and as a result go under but, at the same time you may see more folks that are losing their jobs at big businesses going out and starting small businesses,” he said in the company’s most recent conference call.
The bottom line: After a long and grinding decline, Stamps.com worse days may be behind it. Insiders sure seem to think so.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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