Stamps.com, Inc. (NASDAQ:STMP)

CAPS Rating: 4 out of 5

The Company is a provider of Internet-based postage solutions. Its core service allows customers to buy and print United States Postal Service approved postage using any PC, an ordinary inkjet or laser printer, and an internet connection.

Recs

4
Player Avatar wbcm (< 20) Submitted: 5/17/2007 3:26:57 PM : Outperform Start Price: $11.84 STMP Score: +164.04

Stamps.com

Two Key variables:
1.   Low capital requirement (high return on capital). Stamps.com actually provides a software service to its customers. The PC stamp business does not require any material on STMP’s side.
2.   Superior customer cost benefits in terms of both cost and convenience. Vast growth potential.

Summary
1.   Large market opportunity ($65B US postage, 22M SOHOs)
2.   Significant barriers to entry exist (USPS approval process 2.5 years)
3.   Category leader in PC Postage and Customized Postage, 80-85% market-share.
4.   Superior customer benefits at prices up to 80% less than meters
5.   New market opportunity with PhotoStamps
6.   Recurring revenue model with solid revenue growth, >40% last five years.
7.   Leverable fixed cost.

Revenue and earnings growth in past 8 years.
   1999   2000   2001   2002   2003   2004   2005   2006
Revenue   0.4   15.2   19.4   16.3   21.2   38.1   61.9   84.6
Earning   -56.5   -209.6   -223.4   -6.8   -9.3   -3.7   10.4   16.5
yoy revenue growth       3700.00%   27.63%   -15.98%   30.06%   79.72%   62.47%   36.67%

Growth drivers
1.   Expand customer base.
2.   Growth of photoStamps.
3.   Adoption of multi-user product by larger businesses.

Conservative Accounting:
1.   Advertising costs and promotional costs are expensed as occurred, although revenue is earned over the customer’s lifetime.

Under promise and over deliver:

2002 forecast for 2003:
   Revenue 20 million
2003 actual result
   Revenue 21.2 million

2003 forecast for 2004:
   Revenue 28.6 million
   Net loss: 8 million
2004 actual result:
   Revenue 38.1 million
   Net loss 4.7 million

2004 forecast for 2005:
   Revenue 48.5 million
   Net income $0.26/share
2005 actual result:
   Revenue 61.9 million
   Net income $0.44/share

2005 forecast for 2006:
   Revenue 75-90 million
   Net income 0.53-0.63/share
2006 actual result:
   Revenue 84.6 million
Net income $0.69/share

2007 forecast for 2008
Revenue 87-97 million
Net income $0.77-0.87/share   (including stock option expense)

Valuation:
Market cap: $295 million
Cash :$110
EV: $185

2006:
Revenue: 84 million
Cash Flow: $18 million
Cash: $110

2007:
Revenue: 95 million
Cash Flow: $21 million
Cash: $131

2008:
Revenue: 110 million
Cash Flow: $25 million
Cash: $156

Value = 20x$25m+$156m = $656m
Option on higher return of cash (acquisitions, share buy back).
2-3 year target Price: $30

PE
5/16/20007 price $13.5.
Cash per share =106m/23m=$4.6

2007 projected earning $0.80/share
2007 forward PE=$8.9/0.80 = 11

2007 IV:

Cash on hand = 106 m
(200 million NOL)
NPV of NOL = 70 m
EV = 295-106-70=119m
EV/FCF=6

Recapitalization Valuation:
Assume they used $110 mil in cash to buy back shares, and they could do it in one slug at today’s price of $13.50. They would buy 8.15 mil shares. They would have 13.77 mil shares remaining. They would lose the interest they are earning on their cash, so free cash flow would drop to around $14.8 mil. So FCF would be roughly $1 a share, meaning the biz would be trading at 13.5 times free cash flow, which is a good bit cheaper than the average market multiple. Let’s say sometime in 2 years they get a value of 18 times, and free cash flow doesn't grow at all. We would have an $18 stock, or about 35% total return.

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