I'm fit to be tied today. On one hand, Motley Fool Income Investor recommendation Pitney Bowes (NYSE:PBI) is exactly the kind of firm I want for my portfolio. It's slow, steady, and pays a generous 3% dividend.

On the other, the document management company best known for postage meters also has a serious problem. Cash flow, it seems, is declining. Dramatically. (Look at the numbers we published earlier to see for yourself.)

Take a close look at the third-quarter announcement, released two days ago, and you'll notice that the problem has to do with how the company manages working capital -- particularly receivables. You see, Pitney Bowes reports two types of receivables, one relating primarily to product sales and another to financing equipment purchases. Combined, total receivables were up a modest 8%, compared with an 11% increase in sales. Look deeper, however, and the story becomes much more disturbing.

Finance receivables don't waver much from quarter to quarter. During Q3, for example, Pitney Bowes' $1.36 billion in IOUs from financing barely nudged above the $1.355 billion booked during the same period in 2004. Product receivables are a different story, however. Take a look at this chart, which compares product receivables with sales over the past four quarters:



YoY Growth


YoY Growth

Q3 2005





Q2 2005





Q1 2005





Q4 2004





Notice that annual receivables growth has accelerated as sales growth has slowed. That's not good news. It's probably also worth mentioning that product receivables have risen -- in come cases significantly -- in each of last eight quarters. Sequential sales haven't matched that pace. In fact, from Q4 last year to this year's Q1, sales took a seasonal slide, as did revenue from Q2 to Q3. Moreover, such rampant receivables growth can retard FCF, even if sales and net income are up. That's the case here, excluding restructuring costs, because receivables are nothing more than IOUs that have yet to be paid.

Still, there's a decent valuation case to be made here. Over the trailing 12 months, Pitney Bowes has booked $613.3 million in FCF, by my count. That's more than enough to fund its ample dividend, buy back shares, and continue with accretive acquisitions. It also means that Pitney Bowes trades for 15.7 times its FCF.

It gets better. Analysts expect Pitney Bowes to grow earnings by 8% over the next eight years. Yet the company could prove a value even if it misses those projections. I plugged my FCF estimate into the discounted cash flow calculator available at Motley Fool Inside Value along with the following:

  • 230 million in shares outstanding, to account for buybacks.
  • A 10% discount rate, to account for the size and relative stability of the business.
  • And growth rates of 7% for the next five years, 6% for the next five after that, and 3% ongoing.

You know what pops out? A valuation of $51 per share, for a potential return of 23%. And that's before the dividend. So you can go ahead and color me conflicted. Fiscal management appears to me headed in exactly the wrong direction, yet this supposedly bad business could be a bargain even if it underperforms growth targets.

In truth, I'd really like to see improvement in A/R before buying in. Still, the valuation case is astounding. I'd be crazy not to add this stock to my watch list. And so it is. Welcome to the ranks, guys.

Further Foolishness, postage paid:

  • Investing success comes to those who build dividend dynasties.
  • Could Pitney Bowes' quiet spinoff create a big opportunity?
  • Just how far will rival Stamps.com go with its custom postage program?

Yes, it's true, Pitney Bowes has lagged the market since its induction into the Income Investor portfolio. As if that makes a difference. Mathew is still crushing the market's total return by more than 3% as of this writing. Take arisk-free trialtoday and you'llget accessto all 54 buy reports. All you have to lose is the prospect of better returns.

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Fool contributor Tim Beyers collaborated with editor Mike Olsen on this story. Both are eternally thankful they no longer have to lick stamps. Neither owned shares in any of the companies mentioned in this story at the time of publication. The Motley Fool has an ironclad disclosure policy.