Buying More Pitney Bowes (NYSE:PBI)

I won’t lie. My Pitney Bowes (NYSE: PBI) the investment has been a seasoned meatball since I bought it back in January 2022. In time, it seems the market has decided to push lower odds. Immediately after I bought it, the share price crashed and was down about 51% when I revised name again 10 months later. I added to my position in November 2022. Fortunately, the stock rallied and is up 147% since then and has returned about 19% since January 2022, versus a gain of about 21.5% for the S&P 500. No I don’t want to draw any general conclusions from this episode. However, in my experience, I’ve learned that when you buy things that are relatively cheap, the likelihood that things will eventually turn out pretty well is pretty high. I should also point out that about 15% of the 19% return I’ve enjoyed since 2022 comes from dividends. So a company that pays reliable dividends over the years documents many deadly sins.

Today I want to find out whether or not it makes sense to buy more, hold or sell and apply the capital elsewhere. I will make that determination by looking at the most recent financial results and looking at the valuation. If there is a relatively cheap upside here, I will definitely add to my position.

Those who read my stuff regularly know that I provide a “thesis statement” near the beginning of each of my articles. Here I give you the “gist” of my thinking on a particular stock, so you can get the high points and get out before you’re doused in too much “Doyle mojo.” With pleasure. So, I will add 1,000 shares to my investment today as a speculative investment. The stock is very cheap by any measure I use to judge such things, and the company’s financials have improved massively. I may regret this, but again, the less you pay per $1 of future sales, etc., the higher your eventual profit. I consider it as close to a law of finance as you can get, so I’m willing to buy based on it. I might regret it in the relatively short term, but I think in the medium or longer term, things will work out.

Financial snapshot

While the company remains unprofitable, there are some significant bright spots that fill me with some optimism. For example, the capital structure has improved massively over the past seven years. Specifically, long-term debt fell by about 40% over that time frame, which is pretty impressive for a company whose revenue was actually lower in 2023 than in 2018.

Additionally, while the latest revenue numbers were only about 0.8% higher than last year at this time, the net loss is about 81% lower. Most of the reason for this is the absence of the $118.6 million goodwill impairment that hurt last year’s income statement, but the company has demonstrated disciplined cost control on several fronts. For example, SG&A expenses decreased by approximately 6%, R&D decreased by approximately 10.5%, and cost of equipment sales decreased by approximately 9.25% compared to the same period a year ago.

So I think this is a company that still has some financial “hair” on it, but it’s moving in the right direction in my view. With that in mind, I’m willing to at least hold my position and possibly add to it if the valuation is reasonable enough.

ASSESSMENT

In the field of investments, everything is relative. If you buy X, by definition you are avoiding a series of Y. For my part, I want my “X’s” to be a combination of cheap stocks in a company that is growing fairly quickly. I should also suggest considering the cheapness of the stock as more important than the growth characteristics of the company. This is why I feel comfortable buying a company like Pitney Bowes. Anyway, what I want to see is a company trading at a relative discount to both the overall market and its own history.

On that basis, Pitney Bowes stock actually looks relatively cheap, as follows. The market is paying ~$0.37 for $1 of sales, which is very close to the lower end of the range for the firm.

Source: YCharts

In addition to the ratio of price to economic value, I want to try to understand what the market “thinks” about the future of a particular company. To do this, I turn to the work of Stephen Penman, specifically his book “Accounting for Value”. One of the most interesting ideas expressed in this book is that the stock price itself has some interesting information embedded in it, including the market’s “thoughts” about the future of a particular company. We do this by applying some high school algebra to calculate the “g” (growth) variable in a standard funding formula. The higher the expectations, the riskier the investment. Under this approach, the market currently “believes” that Pitney Bowes will actually grow at a negative rate of 2.7% from current levels. In my opinion, this is an incredibly pessimistic forecast, especially in light of recent improvements.