3 Reasons the Long-Term Prospects of Stamps.com Inc. Remain Intact

Shares of Stamps.com are down more than 22% so far in 2014, but here are three reasons the long-term prospects of the company remain intact.

Jun 9, 2014 at 10:30AM

Shares of Stamps.com (NASDAQ:STMP) -- one of three vendors licensed by the United States Postal Service to provide online postage and shipping label solutions -- have not been treated well in 2014, with shares down more than 22% year to date. Earlier this year, the company's guidance for 2014 came in below analyst expectations and thus far have weighed heavily on the stock's shorter-term performance. 

Still, there are three key reasons why I have confidence that the long-term prospects of Stamps.com -- the first addition to my Pencils IRA Project in February -- remain intact. 

Free cash flow 
Analysts tend to focus on net income to measure a company's performance, and Stamps.com has often delivered impressive earnings growth to please analysts and investors alike. Since 2010, Stamps.com has grown its net income from $5.53 million to $44.15 million in 2013.

This year, however, Stamps.com has fallen out of the good graces of analysts. Stamps.com management projects 2014 GAAP earnings per share to come in between $1.80 to $2.20, well below the $2.71 reported in 2013. Earnings are projected to take a hit this year for several reasons: more money allocated to marketing and customer acquisition, higher stock-based compensation expenses, and a company shift to obtaining higher-volume shippers. 

Decreasing earnings is never fun for investors, but if they are a precursor to long-term growth, it can be worth the wait. While earnings growth at Stamps.com will face headwinds this year, the company continues to generate noteworthy free cash flow -- measured as operating cash flow less capital expenditures. This gives me confidence in the underlying strength of Stamps.com. 

Over the past four years Stamps.com saw free cash flow production increase tenfold -- that's an average increase of 77% per year -- to $32.48 million in 2013. In the first quarter of 2014, despite a slight year-over-year decrease in net income, free cash flow increased 53.1%. This free cash flow production is hardly representative of a languishing business. 

Long-term focus 
Stamps.com's executive leadership is composed of five individuals -- all under the age of 50 years old -- who have each been with the business for more than 10 years or 71 years combined. This leadership team has demonstrated dedication to Stamps.com, and I will gladly take long-term growth over flashy short-term results any day.

Stamps.com has most recently focused on acquiring higher volume shippers such as warehouses, fulfillment houses, eCommerce businesses, and large retailers. Postage printed by high volume shippers was up 8% year over year in the first quarter of 2014 compared to the overall 4% increase in postage printed across all segments. So high volume shippers seems to be a worthwhile place to look for new customers.

Management's goal for 2014 is to continue introducing "improvements in the software and features that further improve scalability of the product to the largest high volume customers." In other words, management is shifting the business to focus on where the customer need is present and growing. 

"We believe we have a very attractive and sustainable business model," says CEO Ken McBride, "and are looking forward to delivering results over the next five years." It is refreshing to see a five-year outlook from a CEO who has been with the business for fifteen years.

Growth in eCommerce 
Stamps.com is poised to benefit from an ever-growing eCommerce industry, particularly as the company focuses its customer acquisition efforts on high volume shippers. Business Insider reports that online retail spending in the U.S. increased 14% in 2013. As online shopping increases, so does the need for shipping and postage solutions, such as those provided by Stamps.com.    

eMarketer projects worldwide eCommerce spending to increase more than 20% to $1.5 trillion this year and grow to $2.3 trillion by 2018. Keep in mind that the Amazon Marketplace -- composed of more than 2 million independent sellers worldwide on Amazon.com -- saw record unit sales during the 2013 holiday season and sold more than 1 billion units worldwide throughout 2013.

In short, the opportunity for Stamps.com is not dwindling as some might expect. Quite the opposite when considering the continued growth of online shopping and eCommerce worldwide. 

Foolish bottom line 
Investors need to pay close attention to Stamps.com's progress in 2014. I have no problem with short-term hiccups if long-term performance remains intact. I will be watching closely to see that the company's performance this year is indeed just a "hiccup" rather than an indication of a weakening business. 

The stock currently trades at a P/E ratio of 12.4, so the market doesn't have very high expectations for the company. Investors in Stamps.com will likely require patience throughout 2014, but for the three reasons noted above, I am comfortable holding my shares over the next five to ten years. 

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David Kretzmann owns shares of Stamps.com. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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