Pencils IRA Purchase: Stamps.com (STMP)
The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul.
It is never too early to open an IRA and begin investing for retirement. Any money young adults add to an IRA should be money that will not be needed in the next 5, 10, or 20 years. While there are certain select circumstances where IRA funds can be withdrawn before retirement without consequences, it is best to treat IRAs as a very long-term minded investment vehicle. This is what makes IRAs especially helpful investment vehicles for teens and young adults who have many years before they will hit retirement age.
Last month I added Stamps.com (STMP) -- a leading provider of online postage and shipping solutions -- to my watchlist. This month, Stamps is the first addition to my Roth IRA as part of the Pencils IRA Project. Before the inevitable question arises -- do people even need to buy stamps or postage anymore? -- keep two points in mind:
In the most recent Starbucks conference call, Chairman and CEO Howard Schultz made this key comment:
"Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way. Customers research, compare prices and then bought the brands and items they wanted online, frequently using a mobile device to do so. - http://www.nasdaq.com/aspx/call-transcript.aspx?StoryId=1964...
Online shopping is becoming the new norm. Increased nline shopping necessarily comes along with increased shipping (and postage) needs. This helps explain why Stamps has consistently built its cumulative customer base over the past several years, as I explore in more depth below.
One more point to consider is the fact that Amazon Marketplace -- Amazon's marketplace for independent sellers (now 2 million in total) -- is seeing record unit sales:
Amazon today announced a record-setting year for Marketplace Sellers with businesses of all sizes selling on Amazon. In 2013, Marketplace Sellers on Amazon sold more than a billion units worldwide, cumulatively worth tens of billions of dollars. The Amazon Marketplace, which consists of more than 2 million Marketplace Sellers of all sizes worldwide, experienced record growth during the busy holiday selling season. On Cyber Monday, more than 13 million units were ordered worldwide from Marketplace Sellers on Amazon, growing the total units ordered by over 50 percent year-over-year. - http://www.businesswire.com/news/home/20140109005193/en/Amaz...
I am pleased that Stamps has a partnership with Amazon, considering the Amazon Marketplace continues to bring on independent sellers and see record sales. There is an indisputable trend toward online retail, and I believe Stamps stands to capitalize on this trend in the coming years.
With that said... how does Stamps stack up with our five "megagrower" pillars?
Purpose-driven business. Helping the world deliver packages isn't the flashiest of endeavors. Stamps -- recently ranked by Forbes as one of America's Best Small Companies -- is committed to helping business-owners and shippers save time and money by offering convenient and cost-effective postage, shipping, and online checkout solutions.
Part of what separates a purpose-driven business is the answer to the question: "What gets people out of bed in the morning to go work for this company?" As you will see in the leadership and company culture pillars, Stamps stacks up well in this department.
Innovative products and services. Stamps is one of only three vendors approved by the United States Postal Service to sell postage and shipping solutions online. Not only does this provide a sizable moat for Stamps, the company is currently in the process of scaling its business to meet the needs of higher-volume enterprises that are increasingly utilizing online shipping services. Additionally, Stamps continues to invest in strategic partnerships with Amazon and eBay, to seamlessly integrate with e-Commerce platforms and online shopping carts.
This January the company was assigned a patent -- four years in the making -- "for the computerized generation and printing of a U.S. Postal Service Shipping Label over the Internet." After many years of negotiating with the U.S. Postal Service, Stamps is also now able to sell first-class stamps for $0.48 versus the $0.49 charged by the U.S. Postal Service, marking "the first time in history that such a single piece letter discount has ever been made available by the postal service." In short, Stamps provides an innovative service that saves both the U.S. government and a wide array of enterprises time and money.
It also benefits the little guy too, Stamps's cumulative monthly customer subscriber count now stands at 468,000, up from 385,000 in 2011 and 435,000 in 2012.
Visionary, experienced, involved leadership. Stamps has a slate of executive leaders who have been with the company since 1999 and are still 45 years old or younger. Stamps's independent directors own 14% of all shares outstanding. This management team has proven their commitment to the business, sticking with Stamps through the bursting of the tech bubble and the 2008 economic meltdown.
"We believe we have a very attractive and sustainable business model," says Co-President and CFO Kyle Huebner, "and are looking forward to delivering results over the next five years." Experienced, innovative, and forward-thinking management; that is a winning combination, if you ask me.
Consistently increasing cash-flow production. In the first three quarters of 2013 Stamps produced $33.2 million in operating cash flow, surpassing the $27.29 million of operating cash flow generated by the business in 2012. This is a marked improvement from the $4.8 million in operating cash flow generated in 2010.
This stellar cash flow production has led to a sturdy balance sheet of $87.21 million in cash with no debt. To top it off, in 2013 sales grew by 11% and earnings grew 35% to $38.93 million. With strong margins, continued cash flow production, and a rock solid balance sheet, Stamps is in excellent financial condition to capitalize on future opportunities.
While the company may report relatively slower results in 2014 due to shifts within the business, I believe management is making the proper adjustments -- and has the financial backing -- to ensure Stamps continues to grow over the long haul.
Strong company culture. Stamps prides itself on an entrepreneurial culture where employee creativity is encouraged. Employees give the company a 3.5/5 rating on Glassdoor, and CEO Ken McBride has an impressive 88% approval rating from employees on Glassdoor. The Better Business Bureau gives Stamps an A+ grade based on factors such as the company's low volume of customer complaints.
Foolish bottom line
I opened my position in Stamps prior to the company's earnings release just over a week ago, when the stock was trading at a P/E of 18. Despite beating analysts earnings estimates, the stock was hit by as much as 11% following the company's earnings report. Today the stock trades at a P/E of 15, which strikes me as a very reasonable value for a quality business capitalizing on the growing online retail market.
With a market cap below $600 million, Stamps will probably be one of the smaller (and lesser known) businesses added to the Pencils IRA Project. Despite the market's negative reaction to the company's latest earnings report (and my unfortunate timing buying in before the earnings report), I remain confident that Stamps will continue to generate value for its numerous stakeholders and offer market-beating returns in the coming years.
Short-term volatility is inevitable, but I think Stamps has a good chance of beating the market over the next 3-5 years and beyond.