Pitney Bowes (NYSE: PBI) is Surging, Is it Too Risky?

On December 29, Pitney Bowes NYSE: PBI announced that it is reinstating its 2020 holiday season pricing – effective January 25, 2021. The company cited labor and transportation costs, COVID-related costs, and an expectation that record delivery volumes would “continue well into 2021 and beyond” in its press release.

Investors cheered the news, and shares jumped more than 18% to $6.41 a pop. After essentially going sideways for the next three sessions, PBI jumped nearly 8% yesterday.

From a technical standpoint, shares look like they are primed to move higher.

But Consider the Long-Term Context

Pitney Bowes has historically sold postal meters and helped customers with physical mail, which, to put it gently, is not a booming industry in modern times. Management has pivoted to e-commerce – revenue in the e-commerce business grew 47% yoy to $410 million in Q3 – but the company’s historical business is in an irreversible decline.

Since peaking in the 1990s, PBI shares have lost more than 90% of their value. Over the last five years, shares have lost roughly two-thirds of their value.

All that said, the investor reaction to the company’s Q3 earnings was surprising:

You may have noticed a big drop on the chart in late October. Well, that drop came on the heels of the Q3 earnings report – shares plummeted 28.5% in that one session.

The numbers were solid. Revenue grew 13% yoy for the quarter, the fastest growth rate in over a decade. Earnings were 7 cents per share, topping analyst estimates of 5 cents per share and a 2 cents per share loss in the same-period a year ago.

What may have spooked investors was the announcement that the company’s CFO had accepted a role with Colgate-PalmoliveNYSE: CL. You certainly don’t want to see a C-Suite executive depart at such a critical time for a company. And PBI’s CEO lamented the loss on the earnings call. Repeatedly.

But a 28.5% decline because the CFO is leaving? Heck, it’s hard to imagine Amazon NASDAQ: AMZN stock going down anywhere close to that amount if the legendary Jeff Bezos suddenly stepped away.

Profit-taking may have been partially responsible for the dip.

Over the three-and-a-half months leading into the Q3 earnings report, PBI shares had more than tripled. Profit-taking would never drive a move of this magnitude for a large-cap, but PBI has a market cap of around $1 billion, so it’s more of a possibility.

Two months later, PBI shares are still trading lower than they were before the earnings release – even accounting for the surge that has happened over the past five sessions.

Is the Risk-Reward Attractive?

Let’s start with the good: PBI is trading at 17.4x projected 2021 earnings and 9.6x projected 2022 earnings. The e-commerce business won’t grow at 47% moving forward – 2020 was a great year for e-commerce and Pitney Bowes is growing it from a small base – but it could certainly grow at a double-digit CAGR over the next three years.

The bad: It is important to reiterate that PBI’s historical business is in an irreversible decline. Company-wide earnings are expected to increase considerably over the next couple of years, but revenue growth is expected to grow at a much slower rate. Revenue could start to decrease as we move towards the mid-2020s.

But debt is Pitney Bowes’ biggest problem:

Pitney Bowes has $2.6 billion of long-term debt. Though the company has $1.74 billion of cash, short-term investments, and finance receivables, that is still an implied net debt position of $860 million. To put that number into context, Pitney Bowes’ EBITDA was $75 million over the last 12 months. Its market cap is $1.18 billion.

How Should You Play PBI?

It’s easy to talk yourself into a Pitney Bowes investment. If the company’s 2022 earnings projection comes to fruition, you’d have a company that is trading at less than 10x earnings. That’s almost impossible to find in our current market environment, where deep-valueis scarce.

But Pitney Bowes’ debt is going to hang over the company for many, many years to come. There is a number where the risk-reward is attractive, but nearly $7 a share looks too high for PBI. Consider staying on the sidelines for now, but keep an eye on this company. A disappointing quarter or two could put PBI into buying range.