When the U.S. Postal Service announced a raft of post office closings late last summer, investors figured that postal customers would turn to buying stamps online. So they climbed aboard the Stamps.com Inc. bandwagon.
But since then, the move to shutter post offices has met with stiff resistance and the timetable for closures has been pushed back. The result: Investors have cooled toward the online stamp seller.
Since Memorial Day, the company’s stock has dropped more than 10 percent to roughly $23 a share, and this despite strong first quarter earnings and analyst upgrades. The stock is now down 30 percent from October’s peak.
Momentum investors – those who ride rising stocks – have been selling their shares.
“A lot of momentum investors jumped into the stock last year and then there’s this pause because the U.S. Postal Service is not moving forward with the announced closures right at this moment,” said Kevin Liu, an equity analyst with B. Riley & Co. in West Los Angeles.
Stamps.com is one of only three companies that the Postal Service has authorized to sell stamps and other postal products online, allowing people to order stamps over the Internet and print them out on their own. The company sells monthly subscriptions to consumers, businesses and online retailers. Its core market has long been small businesses that send out regular mailings.
The company, which operates out of a low-rise office building in Playa Vista, was founded in 1996 and looked promising during the dot-com boom of the late 1990s. Its stock peaked at nearly $90 a share in 1999 before tumbling during the dot-com bust and languishing through two subsequent recessions.
Shares began to pick up last year. Company marketing efforts to online retailers and large corporations with multiple offices began to pay off and strong earnings resulted.
A year ago, the stock was at about $12. Then, after the Postal Service announced its planned cuts, Stamps.com stock really took off, hitting $33 a share in late October.
Postal cut snags
The Postal Service, after $25 billion in losses over the last five years, last summer announced plans to close up to 3,700 branch offices and 250 mail processing centers, and eliminate Saturday delivery.
Office closures would presumably drive up demand for online stamp purchases.
“We believe that any actual post office closings would be beneficial to us as we highlight the convenience of our service for those who would be impacted by the closures,” Kenneth McBride, Stamps.com chief executive, told analysts during a recent earnings conference call.
But elimination of Saturday delivery and processing delays could drive customers away from the Postal Service to Atlanta-based UPS Inc. or FedEx Corp. of Memphis, Tenn. That in turn could hurt Stamps.com, though McBride told analysts that the impact would be minimal.
But communities where post offices were targeted for closures protested and pressured Congress. In the Senate, legislation to carry out the closures was amended to delay closings of offices in rural areas and extend an appeals process for targeted branches. The number of processing centers closed would be sliced from 250 to 125, while Saturday delivery would be maintained for at least two more years.
These delays were not surprising to executives at Stamps.com.
“We always said that the cutbacks were going to be a long, slow and very deliberative process,” said Kyle Huebner, Stamps.com co-president and chief financial officer.
Huebner said the expectation now is that many post offices would cut back on their hours of operation rather than close entirely.
“This would still benefit us,” he said.
But the delays in implementing the cutbacks apparently did spook many momentum investors, who had flocked to Stamps.com because they believed that the company would realize quick gains from post office closures.
“Once these momentum investors saw that the USPS was not moving forward with the closures right at the moment, many decided to cash out their gains,” said B. Riley’s Liu.
Bullish analysts
Liu said other factors have contributed to the recent selloff of Stamps.com shares. Small and microcap stocks have fallen out of favor with investors, and the overall recovery seems tentative at best.
But Liu said the selloff has reached a level where the share price represents a good “entry point” for investors; on June 13, he upgraded Stamps.com to “buy” from “neutral.”
That was the second upgrade for Stamps.com in six weeks. On May 8, Bill Sutherland, senior analyst with Northland Capital Markets in Camp Hill, Pa., raised his rating to “outperform” from “market perform.”
Both Liu and Sutherland cited the company’s strong first quarter earnings and management’s subsequent raise of its 2012 guidance.
During the first quarter, Stamps.com revenue rose 24 percent to $28.3 million compared with the same period the year before. The increase was attributed to strong upticks in subscriptions from online retailers and large corporations with multiple branch locations, such as banks and chain stores. As a result, net income surged to $16.4 million from $2.7 million, exceeding consensus estimates.
Liu said last week that the greatest risk for Stamps.com investors is that the annual rate of subscriber growth could slow from its current range of 15 percent to 20 percent.
“They’ve had very impressive subscriber growth and the question is: Can they continue at this pace quarter after quarter?” he said.
Stamps.com’s Huebner said that there’s still untapped potential.
“The markets we’re playing are very big and have very low penetration, so we believe that if we continue to increase our marketing, we can convert subscribers to PC postage,” he said. “Our biggest competitor is not from another
company, but from the traditional postage meter.”
