There was a time when some were saying that email would make snail mail obsolete, but those paper cuts on your fingers tell a different story. And it's not as if Pitney Bowes is old-fashioned. In fact, earlier this year it teamed up with eBay(Nasdaq: EBAY) to provide online postage solutions for its eBay and PayPal users. So while you may not see FedEx(NYSE: FDX) or UPS(NYSE: UPS) biting their collective nails, Pitney Bowes has rolled with the changes and is now a more diversified mailing services provider.
The company is looking to earn between $0.66 and $0.68 a share in the current quarter. At 18 times this year's profit targets, that doesn't exactly make Pitney Bowes cheap. In fact, it's just a few good trading days away from the $45 mark that Mathew established for the company earlier this year. Yet the company's dependable performance and its refreshing dividend make Pitney Bowes a pretty decent prospect for shareholders who don't mind being paid as they wait on their investments.
"Keep your fears to yourself, but share your courage with others." -- Robert Louis Stevenson
At a time when Sony's(NYSE: SNE) low-budget horror flick The Grudge screamed to the top of the box office, raking in $40 million on its opening weekend, the scariest thing in the industry might be the self-induced cash hemorrhaging at Regal Entertainment(NYSE: RGC). This morning, the nation's largest movie theater operator posted third-quarter net income that plummeted 37% to $27.8 million, or $0.19 cents, on revenue that fell 3% to $611.3 million. Both measures fell far short of estimates.
Admissions revenue decreased by 3.6% to $410.4 million, as a 4,000 drop in the number of moviegoers to 62,300 offset an $0.18 rise in average ticket prices to $6.59. Smaller crowds left fewer people to splurge on overpriced snacks, and concession revenues declined 4% to $154.6 million. Unfortunately, the bottom line took an even bigger hit, as operating margins dropped by over 300 basis points to 12.14%. Through the first nine months, despite a slight increase in sales, net income has plunged by more than half to $58 million ($0.39), versus $126.6 million ($0.89) earned at this time last year.
For a company that is experiencing a falloff in business, some cash management prudence might be expected, but Regal is spending more than ever. In June, management authorized a one-time $5 dividend payment. As I mentioned earlier, the $710 million debt-financed payment was four times the size of Regal's entire $185 million net income last year. At the time, the company only had around $300 million in cash to play with.
This was actually the second such special dividend -- a similar payment had been authorized the summer before. The decision -- which was contested in court by some shareholders -- left the company heavily leveraged, forcing both Moody's(NYSE: MCO) and McGraw-Hill's(NYSE: MHP) Standard & Poor's to lower their credit outlook for Regal from stable to negative.
Now, Regal is continuing to shower shareholders with money, by announcing a 50% boost in the company's quarterly dividend payment. There is nothing wrong with enhancing shareholder value through dividends, provided it can meet other obligations. But why raise the company's yield to 6.3% now? The move seems questionable considering that total debt has swelled to more than $2 billion (with a debt/equity ratio in excess of 25), cash flows are down from last year, and the current ratio of 0.75 indicates that short-term assets are not sufficient to cover short-term liabilities.
Management's generosity doesn't stop there, however, as a planned $50 million stock buyback is also in the works. Stock repurchases can be another great way to enhance shareholder value, but like dividends, only under the right circumstances. There is very little benefit if the price paid is too steep. Essentially, Regal's management is saying they believe the stock is currently undervalued, and while it may not be overvalued, it would be hard to call any stock trading at 35 times book value with a PEG ratio above two a bargain.
Regal is the country's dominant movie exhibitor, operating over 6,000 screens (one in five nationwide). That's 2,500 more than AMC(AMEX: AEN), the next closest rival, and twice as many as privately owned Cinemark. The company owns 540 theatres in nearly all of the top 50 markets, and will soon be adding more after acquiring the Signature theater chain in California and Hawaii. Regal also generates advertising revenue through its CineMedia subsidiary, which was a bright spot during the quarter, increasing revenue by 15%.
But with a deteriorating balance sheet, sliding revenues, contracting margins, and slumping earnings lurking behind the curtains, shareholders might be better off running straight for the exits.
Fool contributor Nathan Slaughter is preparing for a horror-movie marathon leading up to Halloween. He owns none of the companies mentioned.
BorgWarner Revs Up
By
Rich Smith
Auto parts company and Motley Fool Stock Advisor recommendation BorgWarner(NYSE: BWA) turned in another fine quarter yesterday. Whatever effects Detroit's massive discounts on its cars may be having on automakers, they don't seem to have slowed BorgWarner down one bit. In continuation of a trend noted around this time last year, BorgWarner did an end run around "stagnant market conditions" in the U.S. by boosting sales to Europe and Asia. Even the increase in raw material costs didn't keep the company from growing sales and profits strongly.
The results: sales grew 16% over Q3 2003's numbers; earnings rose 22% for a total quarterly profit per diluted share of $0.79. And over the longer, year-to-date term, the company did almost as well, with sales again up 16% and earnings up in tandem.
As good as all that news was, however, it was only the beginning. The company proved even more profitable from a free cash flow perspective, growing that metric by 77% year-on-year to rake in $154 million in the first three quarters of 2004. Much of that was used to pay down long-term debt by $61 million; the rest went into the bank and swelled company coffers to $189 million. That's a luxury that free-cash-flow-negative auto parts makers such as Visteon(NYSE: VC), Delphi(NYSE: DPH), and Superior Industries(NYSE: SUP) can ill afford.
With Detroit starting to slash its production schedules, will it be possible for BorgWarner to keep its growth up and drive its debt down? Considering that BorgWarner was recently tapped to help build a new engine that will become standard at Hyundai, Mitsubishi, and DaimlerChrysler(NYSE: DCX), it seems likely that it can indeed continue to grow. It's becoming more and more a global company, and as it does, a slowdown in any one country -- let alone one city (Detroit) -- should have less and less effect on its bottom line.
For more Foolish auto industry news, read:
Fool contributor
Rich Smith
owns no shares in any of the companies mentioned in this article.
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