Stamps.com Sell-Off Smells Like Opportunity

Despite its dot.com suffix, Stamps.com (NASDAQ: STMP  ) appears to be an underfollowed business with compelling upside potential. The postage solutions business fits the criteria of a disruptive business, even though its core operations revolve around what some consider a dying item: stamps. Sure, one day in the future we may be in a post-postage world, but there is little to suggest that this company's fortunes will turn south anytime soon. Stamps.com recently reported a mixed bag of earnings that left the market with a sour taste, but the long term may still be worth your time. Here's why.

A licking
Stamps.com had a strong run through the first three quarters of 2013, with cash flow outpacing the entire previous year's, and despite the negative market reaction, the fourth quarter wasn't too shabby.

For the quarter, core PC postage revenue was up 10% to $30.3 million, while total revenue gained 8%. Operating margins improved dramatically -- from 2,547% to 30.7%. On the bottom line, adjusted net income grew 29% to $0.61 per share. Non-core postage revenue, which includes marketing partner and promotional online programs, didn't look nearly as good -- sinking 14%. PhotoStamps revenue was down 23%. Investors should note that both segments are being phased out and costing the company very little to operate.

The company's strongest selling point -- printing your own postage -- had a record year with $1.6 billion. Stamps.com's paying customer base is the largest it's ever been, including enterprise customers (the most important).

So why did the stock fall? Guidance. Management expects full-year 2014 sales in the range of $125 million-$140 million. Adjusted EPS should be between $2.10-$2.50. Both the sales and net income low-end range indicated year-over-year declines. The company cited a weak small and medium-size business market as the reason for caution. Core PC postage revenue is still forecast to rise in the neighborhood of 5% to 10%.

Stamped out?
So the company expects a tepid 2014 thus far, but investors shouldn't be too concerned -- especially considering the recent double-digit sell-off. Stamps.com is a cash flow machine, and as it phases out its laggards, that cash flow should only shine brighter. In the long term, small and medium-size businesses should drive demand even if they are hindering it in the near term.

Stamps.com is one of only three businesses that has approval from the USPS to sell stamps online. That's a pretty substantial business moat in itself. The company's continued focus on enterprise clients is a great long-term strategy, as shipping demand will only increase in the foreseeable future.

At less than 14 times forward earnings, Stamps.com is attractively priced. The company has a beautiful balance sheet with zero debt and $87 million in cash. EV/EBITDA looks a bit rich at 13.48 times, but the company remains a compelling play as the only pure do-it-yourself postage stock on the market. Investors should take notice of the recent discount in stock price.

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