A Quick Take on Pitney Bowes

Inflection Point?

See our Primer published this morning for an overview of the company (we don’t send everything by mail as not to clog your inbox)

Seven reasons to buy

• Getting rid of unprofitable businesses

• An ambitious cost-cutting program

• Little exposure to tariffs or macro uncertainty

• Deleveraging creates a bit of a virtuous cycle

• USPS privatization

• Rising dividend

• Still reasonably valued

Against

• Revenue has been stagnant, but that might be about to turn around.

Divesting unprofitable businesses

• In August 2024, the company sold a controlling interest in the entities representing a substantial majority of the Global Ecommerce (GEC) segment (the GEC Entities) operating in the US to Hilco Commercial Industrial.

• This will save the company the losses ($136M in FY23) from the segment and set it up on a path to profitability.

• This isn’t a painless process as there are one-time exit costs of up to $150M involved, but these will move into the rearview mirror soon.

Cost cutting

• Management is focusing on specific areas like indirect spend and external spend, contract and vendor negotiations, and areas like insurance.

• In Q1/25, the company removed an additional $34M of annualized costs. This brought the annualized run rate of cost savings to $157M by the end of Q1 2025.

• Management has raised its cost savings target to between $180M and $200M of annualized net savings over the next year.

Deleveraging

• The divesting and cost-cutting aims to increase cash generation, which is then used to buy back and/or extinguish the company’s debt, creating a virtuous cycle that also eliminates interest expenses. This is working:

• And it looks like the best is yet to come, FY25 guidance for free cash flow jumps to $330M-$370M, and with the divestment cost being a one-off, it could improve further next year.

• The company repurchased $37M in debt, slightly below par, in Q1 and up until a week before the earnings CC, that is, until the end of April.

• Management expects to drop below the 3x leverage ratio target by Q3/25, which will remove limitations on restricted payments under covenants, increasing the ability to take value-enhancing actions like increasing dividends and repurchasing shares, from the Q1CC:

And thanks to all these actions, we have paid off our most expensive debt entirely from company cash and refinanced our revolving credit facility, Term Loan A and Term Loan B with more relaxed covenants. Thanks to the tough decisions and hard work of our teams, we are now in a position that few outside the company could have imagined just 18 months ago, expecting to generate between $330 million and $370 million of free cash flow in 2025. For context, our market capitalization was roughly $500 million less than two years ago. Even based on our current market capitalization of approximately $1.6 billion, we are still trading at only 5x levered free cash flow, representing what we believe is the significant opportunity for investment in our shares.

• As a result of the deleveraging and improving financials, the company’s debt is likely to be upgraded as management held talks with some of the rating agencies. The latter wants to see a couple of additional quarters, but barring a major unexpected headwind, the company seems on track.

Rising dividends and buybacks

• The company doesn’t just use the cash generated for buying back/extinguishing debt, it also pays a dividend and has a share buyback program.

• The dividend was already raised twice this year, from $0.05 to $0.07, producing a yield of roughly 3%.

• The company paid $11M in dividends and bought back $15M in shares in Q1, with Q2 already adding $14M in buybacks ($123M left in the program.

Macro and tariffs

• The company is fairly recession-proof

• Tariffs are not a major concern, as 85% of revenues come from the US, although some customers experience a noticeable uptick in uncertainty.

Possible USPS privatization

• A 2013 study (which was partly financed by Pitney) argues that USPS could privatize essentially all centralized data-intensive processing operations and maintain its current last-mile delivery service as a government entity.

• Presumably, Pitney would be a major candidate to assume the 25% (of the $90B budget) or so that the centralized operations constitute that would be outsourced.

• Trump1 had privatization plans, which could very well be revived, given the pressure on public finances as privatization savings are in the order of $10B.

• Here is what one observer argued:

Assuming $2B of additional business from a USPS partial privatization, PBI’s EPS likely heads above $2.50 and the share price likely heads to at least $20 for over 90% upside.

• Unions are not in favor if this (to put it mildly) so that constitute some hurdle.

Segment discussion and operations

SendTech Solutions

• While revenue was down 9% to $298M, this is mostly due to the IMI migration topping out in Q4/24. Mailers were required to migrate to IMI-compliant devices to remain compliant and avoid service disruptions, causing a demand bubble that topped in Q4/24.

• It’s mainly the mailing business that is declining, the shipping business (which provides advanced shipping software and solutions designed to streamline and optimize shipping operations) is growing and expected to continue to grow.

• The shipping business was hit by a one-time $4M accounting adjustment, without which it would have grown 7%.

• Despite the revenue decline, the segment is producing stellar gross margins (68.9%, up 230bp) and falling OpEx (down $14M or 11%). and (Q1CC):

We continue to see a shift from new equipment placements toward lease extensions. While these lease extensions differ revenue recognition to future periods, they also enhance overall profitability and support stable cash flow throughout the lease term.

Global Financial Services

• GFS is part of the SentTech segment and provides a range of financial solutions to support businesses, including equipment financing, banking services, and commercial lending.

• Its net finance receivables ended the quarter at $1.15B, and its bank deposits stood at $701M.

• Its Bank Receivables Purchase Program allows Pitney Bowes to realize cash from leases more quickly. The program involves the sale of eligible leases to the Bank, reducing parent company interest costs and improving Bank profitability. The Bank held $84M of associated leases at the end of Q1, with a $120M target by year-end, from the Q1CC:

We expect this program to accelerate the return of an additional $100 million in cash over the next few years and we are evaluating other ways to expand the program.

Presort Services

• The Presort Services segment delivers large-scale, technology-enabled mail presorting services that help clients reduce postage costs and improve mailing efficiency, backed by a nationwide network of 30+ sorting stations and strong USPS collaboration. The segment has demonstrated consistent revenue growth, margin expansion, and operational efficiency, which are helped by the occasional tuck-in acquisition, like the latest (Q1CC):

So that deal is going very, very well. It’s been fully integrated within the Presort network. We did not take on any of that company’s assets, so we have completely subsumed it within our existing operations, which improves our capital efficiency, it improves our asset utilization, it improves our returns. Very fast payback. Super excited with how the Presort team has implemented that acquisition and we hope to do more. It’s really a focus area of us to do these small kind of tuck-in acquisitions. But again, I want to emphasize that we are not looking at, game changing, large size, transformative acquisitions, zero interest. But these small tuck-ins, they’re really terrific.

• Revenue was up 5% to $178M, driven by higher revenue per piece. Gross profit up $11M (17%), helped by pricing, a 3% improvement in labor productivity, and 3% lower unit transportation costs, so OpEx was down $4M (or 17%)

AI

• The company hired a CIO with an extensive background in AI and is looking for ways AI can help operations and performance, and even rolling it out, although specifics weren’t mentioned (Q1CC):

we are rolling it out to improve our productivity, to improve our performance, to think better, really across the company.

• But it has developed Shipping 360, a SaaS platform that leverages AI and machine learning to optimize shipping operations, providing businesses with enhanced visibility, predictive analytics, and smarter decision-making capabilities to streamline shipping, mailing, tracking, and receiving processes. AI helps automate carrier selection, optimize routes, and reduce disruptions, improving overall efficiency

Slow growth

• To some extent, this is deceptive as there have been accounting changes and divestments, but the decline in mail due to digitalization is real.

• None of this is written in stone, with much of the company (parcels is growing within SendTech, which does suffer from the decline in mail. But the Presort segment is growing, and the company does have a SaaS business (Shipping 360), which is growing strongly.

• And, as SA analyst Kingsley Park Research noted, the company could be a main beneficiary of a USPS privatization.

Outlook

• Management reaffirmed FY25 revenue guidance in the range of $1.95B to $2.0B, with adjusted EBIT is projected between $450M and $480M, and adjusted EPS in the range of $1.10 to $1.30.

• Management is confident in sustaining margin expansion through cost efficiencies and operational improvements.

Valuation

• Encouraging to see the decline this year, but in any case, dilution wasn’t serious.

• At the end of FY24, there were an additional 11.35M options, RSUs, and warrants under equity compensation plans that could convert. So we take 192.6M as the fully diluted share count.

• At $10 per share, that produces a market cap of $1.93B. The company has $323.8M in cash and equivalents and $1.913B in debt for an EV of $3.52B.

• That produces a FY25 EV/S of 1.76x and an EV/EBIT of 7.67x, and, with an analyst consensus for EPS at $1.25 at a single-digit earnings multiple (although given the substantial net debt, that looks better than it is).

Conclusion

• The company has completely transformed its financial position over the past year.

• It has exited the unprofitable GEC business.

• It is executing a $180M to $200M cost-cutting program.

• It has greatly improved cash management and expects to generate $330M-$370M in free cash flow in FY25, a significant increase from approximately $20M a couple of years ago.

• It is leveraging opportunities to unlock value from Pitney Bowes Bank.

• Its current market capitalization of approximately $1.6B represents a significant investment opportunity, trading at only 5x levered free cash flow.

• It is rewarding long-term shareholders by returning a significant amount of capital, sustaining appropriate dividend increases, and meaningful share repurchases are top objectives.

• It could benefit considerably in the event of a USPS privatization.

It’s difficult to see any significant risk that could seriously derail the story, even a recession isn’t likely to dent operations all that much. There are execution risks, the USPS privatization might not happen (but we see that as a bonus, not an essential part of the story) or projections could turn out to be too optimistic. But for now, it still seems a good buy to us at $10, offering excellent risk/reward.