Stock Madness 2005: Pitney Bowes vs. InterActiveCorp

The following article is part of The Motley Fool's "Stock Madness 2005," a contest based loosely on the annual NCAA College Basketball Tournament, a.k.a. March Madness. From March 17 to April 4, our writers and analysts will engage in head-to-head competition with each other, advocating and arguing on behalf of 64 stocks we've selected as among the most interesting to Foolish investors. You, dear readers, are the fans and referees -- you'll read these exciting duels and then vote for the stock you think is the better investment... and should therefore move on to the next round of play. The company that survives six "games" will be our tournament champion, and its writer our most valuable "coach."

But, please, make no mistake -- "Stock Madness 2005" is a GAME!

Our writers are doing this for fun. They are enjoying the spirit of competition and the art of debate. They are delighting in the search for positives in the companies they've drawn... and negatives in the companies they're pitted against. They are NOT necessarily recommending these stocks as the ones they believe in above all others. As ever, YOU must decide whether the stocks we're writing about -- winners and losers -- are deserving of your investment dollars.

Pitney Bowes (NYSE: PBI  )
Stamford, Conn.
$44.74
52-week low-high $40.54-$47.50
$10.4 billion market cap

By Robert Brokamp (TMF Bro)

In the March 2004 issue of Income Investor, analyst Mathew Emmert recommended Pitney Bowes when it was trading at $38.39 a share. Today, it fetches $44.74 a stub -- a nice 16.5% return in a bit more than a year. Throw in a dividend yield of close to 3%, and Mathew's readers have done well indeed.

But is past prologue? In this case, it could be. Here's what Mathew wrote about the company: "Pitney Bowes is a cash machine with an impressive recurring revenue base. This provider of mailing services and equipment has been producing solid results since the 1920s and has paid a dividend since 1934." This company is solid. There's no reason to think it won't continue to succeed.

"What?!" you're thinking. "How can a company based on snail mail be a better investment than InterActiveCorp with all its fancy-pants dot-com and boob-tube businesses?" The answer: consistency, my friends. Give me smooth and steady over herky-jerky any day. To see what I mean, check out the performance over the past two years of Pitney Bowes stock (blue) and InterActiveCorp stock (red) by viewing this chart. (My advice to InterActiveCorp: Lay off the caffeine.)

And by the way, when you're talking Pitney Bowes, you're not just talking stamps and envelopes. The company has an expanding digital services component. Its Enterprise Solutions unit, which accounts for 25% of revenue, offers document creation, distribution, storage, and tracking services. Just look around your office the next time you're at work and ask whether your employer couldn't use some of those services.

Besides landing big contracts, such as a recent $112 million mail-servicing agreement with Bank of America, Pitney Bowes has made some smart deals, such as the acquisition of Ancora Capital Management (in California, Pennsylvania, and Maryland) and Groupe MAG (France, Belgium, and Luxembourg), the purchase of assets from Kilburn Office Automation Ltd. (India), and a joint venture with Semco Participacoes Limitada (Brazil).

Worldwide growth from a company with impressive cash flows and an above-average dividend. Mail it in, baby!

Robert Brokamp, who is the editor of theRule Your Retirementnewsletter service, does not own any of the companies mentioned in this article.

InterActiveCorp (Nasdaq: IACI  )
New York, N.Y.
52-week low-high: $19.16 - $34.62
$22.29
$15.5 billion market cap

By Jeff Hwang

Here's a stock that is a clear buy.

The fact is that Internet pure plays with truly viable businesses are rare, and most of them -- including Google (Nasdaq: GOOG  ) , eBay (Nasdaq: EBAY  ) , and Yahoo! (Nasdaq: YHOO  ) -- carry premium price tags. But if you'd like to own one on the cheap, then InterActiveCorp -- the outfit run by media mogul Barry Diller -- offers such an opportunity. Sometime during the second quarter, the company plans to spin off IAC Travel (along with TripAdvisor) -- the segment that includes Expedia, the largest online travel website in the world.

IAC generated $1 billion in free cash flow last year and $1 billion in free cash flow in 2003. Similarly, the company saw operating income before amortization climb 19% last year to $1.02 billion. IAC Travel accounts for about half of OIBA, and the steady Ticketmaster and electronic retailing businesses (including HSN) account for about 40% of OIBA.

The company continually invests its cash flow by acquiring upstart businesses such as Lending Tree, Expedia, and Hotels.com, providing the catalyst for future growth. IAC also showed interest in investing in its more mature electronic retailing business with the recent $720 million acquisition agreement with Cornerstone Brands. The bottom line is that the company's $1 billion in annual free cash flow, as well as the $2.8 billion in cash over $1.5 billion in debt on the balance sheet, enhances the value of the acquisitions while lowering their risk.

At about $16 billion, the market is saying that IAC Travel is worth 20 times OIBA, and that the rest of IAC is worth 12 times OIBA (operating income before amortization). But value IAC Travel more like its Internet peers; then at 30 OIBA the rest of IAC is free, and the total package is a low-risk bargain with better-than-moderate upside.

Fool contributor Jeff Hwang owns shares of InterActiveCorp.

Rebuttals
Reading Jeff's argument for InterActiveCorp, I have a one-word reason why not to vote for this company: Ticketmaster. Any company that charges you a "convenience fee" and a "processing fee" (which can add up a 35% markup of the ticket price) just to put you through a voice-mail maze deserves universal hatred. Get this: Even if the concert is cancelled, you don't get your "processing fee" refunded. Is there a "service" more hated than Ticketmaster? I can think of nary a one. -- R.B.

Can't argue with solid, but I can argue with return. The enterprising investor is a forward-looking one and would much prefer a herky-jerky 25% annual return than a smooth 15% -- particularly when he does not have to pay for any additional risk, as I believe is the case with InterActiveCorp. -- J.H.

Who won? Click here to cast your vote.

The Motley Fool is investors writing for investors.


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