Internet postage leader Stamps.com
Even more notable, however, was the announcement that the company would be returning $1.75 per share in cash to shareholders in early February -- this for a stock that closed under $7 per share on Tuesday, the day before the announcement.
Owners of technology stocks can be forgiven for being a bit baffled by this behavior on the part of the Stamps.com management. Even modest dividends are a rare exception in the technology sector; a massive return of capital back to shareholders is a technology stock market event similar to Haley's Comet -- you might have to wait 76 years before you see another one. So what's going on here?
Before I give you my take on these developments, let's get some history on the story. Stamps.com was founded in 1996 and went public in June 1999 at $11 a share. In December of 1999, Stamps.com raised more than $355 million in a secondary offering priced at a whopping $65 per share, at which time the company's market value was in excess of $3 billion -- for a company with virtually no revenues.
Suffice to say, the company didn't take off like investors had hoped. Plagued by poor capital allocation decisions and a wildly oversized cost structure, Stamps.com managed only $15 million in total sales and reported a gargantuan loss of more than $200 million in 2000, sending the stock to $2 by the end of that year. The company then went through three restructurings and three CEOs in the course of a miserable year, during which the stock was trading below the value of the cash on its books.
But good things slowly started to happen. Under new CEO Ken McBride, who took over the show in August of 2001, the company cut costs and worked hard to make the service easier to use, an effort that culminated in the launch of a vastly improved and far more customer-friendly version of the software.
Stamps.com posts a comeback
I picked up the story in my recommendation of the stock in The Motley Fool Select (now Hidden Gems) in April 2003. At the time, the stock traded for a dirt-cheap $4.15. I noted that Stamps.com possessed an 80% market share for online postage, had $3.88 per share in cash sitting in the bank, and was in the early stages of rolling out its new and much-improved service.
After hitting a trough in early 2002 prior to the new product release, the company's financial results started to noticeably improve in the second half of that year. While the company was still burning a modest amount of cash, it was clear that the company had a real shot at growing the business. Furthermore, after backing out the $3.88 of cash sitting in the bank, Stamps.com had an enterprise value of only $12 million.
I was also impressed with the management's confidence in its own prospects. It was buying back shares like crazy and had repurchased more than 11% of the outstanding shares in the second half of 2002 alone.
Fast-forward to today. The stock, which last year traded at only a slight premium to cash, has made a very nifty move to well over $7, closing at above $7.40 on Wednesday. For the full 2003 fiscal year, revenues increased 29.8% to $21.2 million. In its investor call, the company projected 35% sales growth for 2004, and noted that it will increase its advertising and marketing spend to $10 million next year in order to drive additional customer growth.
While the increased marketing expenditures are expected to keep Stamps.com from making a profit next year, there will be plenty of cash left over after its big distribution to see it through to expected profitability in 2005. At the end of 2003, Stamps.com had $162.8 million, or $3.69 per share, in cash, far more money than this company needs to execute its business plan.
The check's in the mail
I am mightily impressed with the company's decision to return the excess cash to its shareholders. It's the mature and efficient thing to do, since the company doesn't need the money, and shareholders are likely to get a better return on that capital than Stamps.com can get with it sitting in the bank. Giving it back also removes any temptation to do something dumb with the money. Finally, it indicates that this management team realizes that the money belongs to its shareholders, which is a rare trait in today's public markets.
But what of the reverse stock split? The answer to this one is relatively simple. After the cash distribution, a rational market should adjust the company's stock price by a similar amount, which would push Stamps.com back toward the $5 mark. Having just recently climbed out of the cellar, the management is likely aware that many institutional investors have a strong bias against sub-$5 or even single-digit stocks. I believe that the management team wants to make the stock more respectable in order to attract a wider investor base. Basically, I feel much the same way about this as I do about a stock split: It makes no difference to the value of the stock, so it is a non-event.
So how attractive is Stamps.com as an investment? I expect the stock to drop in price by about $1.75 after the record date for the return of capital (Feb. 9), which would put it at about $5.65 per share. This price equates to a market cap of about $253 million. With about $1.85 per share in cash left after the payout, the enterprise value would be $170 million. While I really like this little company, $170 million seems steep for an unprofitable company with projected 2004 sales of $28 million. I sold my shares when the stock hit $6 -- about 23% too early. Though I would have liked that last dollar, I do not regret my decision to sell when I did. Value investing is about finding the low-risk profits and leaving the rest to others.
Guest columnist Zeke Ashton has been a long-time contributor to The Motley Fool and is the managing partner of Centaur Capital Partners LP, a money management firm based in Dallas, Texas. At the time of publication, Zeke held no position in Stamps.com. Please send your feedback to [email protected].
