It Will Be Difficult for this Company to Deliver

Pitney Bowes (NYSE: PBI  ) seems confident about its future potential. While there are a few reasons to be optimistic about this company, several headwinds exist.

A Major Headwind
As Pitney Bowes states in its 10-Q, it helps businesses grow through more effective communications with their customers via physical, digital, and hybrid channels. The problem is that physical mail volumes are in consistent decline due to the increased popularity of digital communication. 

The good news is that Pitney Bowes plans on building its e-Commerce infrastructure. However, it's still undetermined whether or not Pitney Bowes can grow enough in the digital area for sustainable top and bottom-line improvements.

Looking at its top and bottom-line performances over the past five years, one can see that Pitney Bowes hasn't exactly strategized well:

PBI Revenue TTM Chart

PBI Revenue TTM data by YCharts

The Lesser of Two Underperformers
You might have noticed Xerox (NYSE: XRX  ) in that chart as well -- a competitor of Pitney Bowes.

Though Xerox hasn't been hitting it out of the ballpark over the past several years, it's at least showing positive revenue and earnings trends over a five-year time frame.

When you compare these two companies on a fundamental basis, at first glance, you might think that Pitney Bowes is more impressive with a return on equity of 84.15% and a dividend yield of 4.10%, versus a ROE of 10% and a dividend yield of 2.30% for Xerox. However, Pitney Bowes' debt-to-equity ratio of 11.47 is considerably higher than the debt-to-equity ratio of 0.67 for Xerox.

While both companies face challenging circumstances due to global economic weakness and cautious customers, a high debt load will significantly impede the growth potential of Pitney Bowes, whereas debt will only have a limited impact on Xerox.

As far as under-performance goes, consider the stock performances of these two companies over the past five years:

XRX Chart

XRX data by YCharts

Stock performance can sometimes be misleading over the short to medium term, but when two stocks under-perform the market over a five-year period, it indicates investor squeamishness about those companies due to underlying problems or potential headwinds for those companies. In this case, it simply comes down to declining demand for products and services.

Recent Performance and Outlook
Revenue for Pitney Bowes declined 1% in the second quarter year over year, but let's break it down a little further.

Revenue dropped 3% in the SMB Solutions segment. Revenue breakdown:

  • North America Mailing: down 5%
  • International Mailing: down 1%

Revenue improved 3% in Enterprise Business Solutions. Revenue breakdown:

  • Worldwide Production Mail: up 18%
  • Software: down 8%
  • Management Services: down 3%
  • Mail Services: up 10%
  • Marketing Services: down 17%

Logically, Pitney Bowes plans on shifting more of its attention toward Enterprise Business Solutions -- where it's seeing more growth potential. The negative here is that this segment has lower margins.

A bright spot for Pitney Bowes is that it recently sold its North America Management Services business to Apollo Group Management (NYSE: APO  ) for $400 million. Pitney Bowes plans on using the majority of this capital to pay off debt.

This deal might negatively impact the top line for Pitney Bowes, since North America Management Services represented 19% of the company's revenue. It also represented 8% of net income. Apollo Group Management excels at purchasing under-performing assets and turning them around. Therefore, if you're an investor or potential investor in Pitney Bowes, and you're considering a different avenue, you might want to consider Apollo Group Management Group's growth performance over the past year:

APO Revenue TTM Chart

APO Revenue TTM data by YCharts

If you would prefer to stick it out with Pitney Bowes, then you will at least be happy to know that the company expects growth in certain Enterprise Business Solutions segments for the following reasons:

  • Continued expansion in Mail Services and Presort operations
  • New e-Commerce initiatives
  • Market acceptance of new solutions

Difficult Delivery
Though potential exists in Enterprise Business Solutions and in the digital market, the company's revenue and earnings-per-share performances have been poor, debt levels are high (though improving), and demand for physical mail continues to fade. Pitney Bowes has a very steep mountain to climb. You can easily find other investment opportunities with more growth potential and less downside risk.

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