Stamps.com ( Nasdaq - STMP ) -- The Empire Strikes Back

Stamps.com (STMP $25.00) reported excellent on target Q4 results.  But the company indicated that its rate of growth probably would moderate in 2012.  Stamps.com effectively penetrated the small and medium sized business market last year.  The company's traditional consumer operation has been leveling off for several years, though, mainly because individuals use the U.S. Postal Service less than they used to.  The office market was picking up the slack, along with a boost in high volume shipping accounts.  Stamps.com created a substantial backlog of commercial accounts, frequently consisting of large companies with branch offices scattered around the country.  Those deals came on line, by and large, when existing contracts to use Pitney Bowes postage meters expired.  Stamps.com's Internet download service provided a significantly less expensive alternative.

The churn rate in the consumer segment is threatening to increase.  So Stamps.com is planning to boost marketing efforts to retain existing users and replace the ones that leave.  That spending is likely to affect profit margins in the short run.  More ominous is Pitney Bowes's development of a competing Internet service.  That program hasn't been formally introduced yet.  But the market leader did recently hire a former Stamps.com marketing executive to lead the charge.  Longer term, the new strategy at Pitney Bowes could work to the company's advantage by shifting the whole industry to an Internet format.  For now, though, it probably will become more difficult to persuade Pitney Bowes customers to switch vendors.

We have reduced our 2012 earnings estimate by 14% to $.90 a share (fully taxed).  We have lowered our sales estimate by $10 million, as well, to $115 million.  Those figures could be revised upward if Stamps.com's enhanced marketing program delivers strong results, or Pitney Bowes either drags its feet or fails to launch a competitive service.  The stock is likely to be a lackluster performer until some clarity emerges.

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Stamps.com (Nasdaq - STMP) -- First Class Mail

Stamps.com (NasdaqGS: STMP $25.00) is the leading provider of USPS-approved, software-only electronic postage. The company offers a breadth of mail classes to its customers, which range from individuals to large businesses. The postage is printed onto stick-on labels, or directly onto envelopes, using any printer. Customers pay a fee between $15.99 and $39.99 per month to use  the service, in addition to postage. Bulk mailers can receive discounts on select mail classes. The company’s most popular item, NetStamps, lets customers print out stamps of any price, eliminating the fuss of mixing and matching postage.

Stamps.com (“Stamps”) offers service that is cheaper than its competitors’. Unlike chief rival Pitney Bowes, Stamps customers don’t need to purchase or rent postage meters. Postage meters commonly involve a monthly service fee, plus added costs for maintenance, insurance and toner cartridges (which can run hundreds of dollars). Additionally, Stamps’ service can be canceled without penalty. Pitney Bowes customers enter into a lengthy lease with steep cancellation fees. Pitney Bowes deployed a Web-based postage service in 2004, in conjunction with eBay. Endicia (owned by Newell/Rubbermaid), Stamps’ other competitor, traditionally operated in large volume shipping, but now offers services similar to Stamps. Endicia offers a basic plan for $9.95 a month. Stamps has no other direct competition, as the USPS has licensed only these three companies.

Stamps has over 400,000 customers, and that number is growing. The company estimates there are 50 million potential customers in the United States. We estimate Stamps’ market share could increase from the current 0.8% to around 5% (2.5 million customers). Businesses are defecting from Pitney Bowes, whose machines cost up to 80% more per month to operate than Stamps. However, considering the steep buyouts, most companies are waiting until their leases end with Pitney before switching to Stamps.

In addition to the cost savings, larger companies are embracing Stamps’s software. The software, which is included at no extra cost, automatically manages and records orders and shipments for a company’s remote offices. It can also be combined with various e-commerce sites like Amazon and eBay, which aids smaller businesses.

Convenience is the company’s main allure. Customers simply print out exact postage instead of taking lengthy trips to the post office. Stamps can be printed out individually or in bulk. All mailing addresses are automatically verified (using the USPS database) by Stamps beforehand, so customers won’t waste postage by shipping to undeliverable locations. Several small business customers have noted that the printed postage looks more professional than traditional stamps. Stamps keeps an easily accessible history of every parcel a user sends for straightforward record keeping. The company’s service was integrated with Amazon.com Marketplace in July 2010. Stamps won a contract to provide electronic postage for the USPS Click-N-Ship service last February.

Customers also enjoy discounted postage rates, and other services. Users receive discounts of up to 15% off for Priority Mail and up to 21% off Express Mail. Customers that meet certain volume benchmarks qualify for larger discounts: up to 28% off Priority, and up to 32.5% off Express. Delivery confirmation costs between 40 and 70 cents less per package than it would at a post office. However, with the monthly service fees that apply, Stamps is not ideal for infrequent mailers.

It remains to be seen how the decay of the USPS will affect Stamps. The company could mop up customers from areas where offices scale back hours or are closed altogether. But by the same token, businesses may cut back on mailing should the Postal Service decide to do the same with delivery hours and routes.

Revenue should make a significant leap in 2011, after holding steady around $85 million the last four years. We project year end revenue of $100 million, up 17% from $85.5 million last year. We anticipate fully taxed earnings per share of $.85 for the year, an 85% increase from $.46 in 2010. Share earnings could jump another 24% to $1.05 for 2012. Diluted shares outstanding should increase to 16.5 million to 17.0 million in the fourth quarter 2011, from 15.5 million.

Target revenues of $200 million are realistic in the next two to three years, with fully taxed EPS of $2.00. Stamps has more than $200 million in tax loss carryforwards, so it won’t have to pay cash taxes for five to seven years. Earnings excluding income taxes would be $3.00 a share. We anticipate a target price of $50 a share, an appreciation potential of 100% from the current quote.

Stamps is based in Los Angeles, CA. 

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