Pitney Bowes stock is a terrific opportunity right now – though it may not look like it at first glance.
The five-year chart is about as bad as it gets.
Shares of Pitney Bowes Inc. (NYSE: PBI) are trading just above $7 – down nearly 75% from a July 2014 high of $28.18. The S&P 500, in the same time frame, has risen 47%.
The company's historic business of selling postage and mail production equipment to other companies has declined along with mail volumes over the past decade or so.
In fact, Pitney Bowes is in the midst of a years-long turnaround – but many investors remain skeptical. Short interest rose from 3.5% of the shares outstanding in May to 9% now (the average short interest among companies in the S&P 500 is 4.2%).
But in this case, as they say, it's all a matter of perspective.
If you think the company's turnaround strategy will succeed, as I do, then PBI stock is a screaming bargain right now.
Have a look…
Pitney Bowes Is Already Past Its Hardest Days
The fate of the turnaround is the key to the Pitney Bowes stock price. It's been underway since 2012, when the company hired Marc Lautenbach, who spent 27 years at International Business Machines (NYSE: IBM) in several senior positions, to serve as the new CEO.
That early start matters. Think of all the companies that only tried to address a failing business model when it was already too late, such as Eastman Kodak (NYSE: KODK) and Sears Holdings Corp. (OTC: SHLDQ).
Lautenbach first set out to stabilize Pitney Bowes' legacy businesses – mail is declining, but it has been a gradual decline. The company has sought to hang on to as much of this business as it can for as long as it can because of the plump profit margins – over 40% on its U.S. mailing business, for instance.
Next, Lautenbach developed a strategy to transition to new areas where Pitney Bowes will be able to grow revenue. The company acquired a number of software businesses, including one that calculates taxes automatically for clients and another that provides location data.
The company in particular is focused on serving the rapidly growing e-commerce industry. That drove Pitney Bowes' biggest and most important acquisition in 2017, the $475 million deal to buy Newgistics, a provider of parcel delivery, returns, fulfillment, and digital commerce solutions for retailers and e-commerce firms.
At the same time, Pitney Bowes divested several businesses that no longer fit the new strategy. The company used the cash from those deals to finance the new acquisitions as well as to pay off some debt.
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While the strategy is sound, it has put pressure on the company's earnings and cash flow. Investors tend to react badly to hiccups in a company's earnings and cash flow, not to mention uncertainty about a company's underlying business.
But after several years of uneven performance, particularly in 2017, Lautenbach's efforts have begun to bear fruit over the past two quarters…
Why Pitney Bowes Stock Is Undervalued Now
Pitney Bowes missed earnings expectations in the last quarter of 2017 and first quarter of 2018, but met expectations the quarter after that and beat them in the most recent quarter.
And there was plenty of evidence the turnaround is succeeding.
In the company's 2018 second quarter earnings, EBITDA in the global e-commerce segment grew 200% year over year, while EBITDA in the software solutions grew 182%. That was more than enough to offset declines in the company's pre-sort and small and medium business solutions segments.
Overall, EBITDA grew by about 4%, but the point is that the turnaround showed clear signs of gaining traction.
Now let's skip ahead to the Q3 results, reported in November. Earnings per share (EPS) beat expectations by $0.01, ($0.27 vs. $0.26). Revenue rose 13.6% year over year. Global e-commerce again performed well; sales rose 119% from the same quarter in the previous year while EBITDA in the segment grew 142%.
The overall results weren't necessarily stunning, but the numbers confirmed the turnaround strategy is working. PBI stock jumped 19% on the news.
Since then, the stock has backtracked as wary investors sold amid a period of market volatility.
It's left Pitney Bowes stock severely undervalued. The price/earnings (P/E) ratio is under 5, far below the S&P 500 average P/E of about 20. The price-to-sales ratio is just 0.326, again well below the S&P 500 average of 2.
Earnings forecasts also suggest Pitney Bowes has turned the corner. According to FactSet, consensus estimates for 2018 show EPS bottoming out at $1.17 and then rising to $1.24 in 2019 and $1.33 in 2020.
Plus, the PBI stock price isn't that far above its 52-week low of $5.51 (the 52-week high, by the way, is $14.80).
Finally, Pitney Bowes has earned the highest possible he Money Morning Stock VQScore™, 4.75.
And while I believe Pitney Bowes is a solid long-term play – this stock should see gains of 60% or more over the next 12 months alone – something could happen in the next couple of weeks to spark some big short-term gains…