Business Model Diligence
Today I want to tell you about a wide moat firm you may never have heard of.
One with our "holy duo" of rising, recurring revenues and very strong competitive advantages.
This is an intriguing company. One that is riding a massive worldwide industry trend growing at over 20% rates worldwide (and at 15% in the U.S. alone). One that, due to regulatory barriers, has a very limited number of direct competitors - and even fewer serious ones. A firm with a 5-year compound annual revenue growth rate of 29%, and a 5-year operating earnings annual growth rate of nearly 38%! And of course, last but certainly not least, a stock that has returned its owners 352% over the past 5 years, annihilating the S&P 500's 72% return.
An Old But Novel Concept
Stamps.com's success is made even more interesting by the simple, appealing, and - frankly - old concept that the company brings to the table.
Do you know of anyone who likes going to the Post Office? I certainly don't. Lines are long and slow. Postal employees, who have to put up with disgruntled customers all day long, are not always the cheeriest lot. Even The Simpsons character Ned Flanders, laid back and unoffending guy that he was, admitted that he hated the post office! Who can argue with that?
Given this, the idea of printable postage - where businesses can buy and print postage away from the Post Office - has always been an appealing one. Being able to weigh items and buy and print postage away from the post office saves a substantial amount of time and effort. Time and effort = lost profits in business.
Before the Internet, the only way to do this was through postage meters, and essentially the only company with USPS approval to sell them was Pitney Bowes (PBI).
With the advent of the Internet, it was then possible to buy postage online and be able to print labels yourself. This is where Stamps.com comes in. Whether you are a small business, an online seller (through eBay or Amazon or Etsy or whatever), or a warehouse shipper, you set up an account with one of Stamps.com's services. This is a recurring monthly subscription model. They send you a scale and you get access to buy postage through their web-based service. With direct software integration, Stamps.com's service allows the shipper almost automatic postage payment and shipping label generation. All they have to do is print it, slap it on the package, and set it out to be picked up. It is a huge time-saver.
"Triple R's": Rising, Recurring Revenues
A wonderful aspect of Stamps.com's business model is that it is one of predictable, recurring revenues. It's also pretty great that they have been rising rapidly and should continue to do so for the foreseeable future!
As mentioned, Stamps.com's offerings are web-based monthly subscriptions. Customers pay them month in and month out, creating a highly predictable level of cash flow. Since there is no real physical product here, there is very little physical plant needed to run the business, and thus very little capital expenditures. This allows impressive free cash flow margins exceeding 30%. The business is a "cash cow".
Granted, some of Stamps.com's impressive revenue growth has come on the back of acquisitions. The firm purchased ShipStation and ShipWorks in 2014, and ShippingEasy in 2016, all of which added to the ability to integrate with more online retailing platforms and additional shippers beyond the USPS (such as FedEx and UPS). 2015 saw the acquisition of Endicia, which represented Stamps.com's first foray into higher-volume shippers, as well as taking one of their primary competitors out of the market.
However, there is plenty of opportunity for continued growth. Organic revenue growth this year is expected to come in at about 15%, and indeed the e-commerce industry worldwide continues to grow at a 20%+ annual clip. Management's 5-year revenue growth target is 20% per annum, driven by both market growth and new product and service offerings.
Without a doubt, Stamps.com has the "triple R's" we love - rising, recurring revenues.
A Sneaky Secure Economic Moat
With cash flows and low capital requirements like this business has, you would expect a deluge of competitors to come in and drive prices down to zero, ruining the business.
But that hasn't happened, and is actually extraordinarily unlikely to happen.
You see, I believe Stamps.com has a wide economic moat in the form of REGULATORY BARRIERS.
If you think about it, allowing customers to print postage is almost the same thing as allowing them to print currency! Clearly this is not something the government wants people doing "willy nilly". As we mentioned before, Pitney Bowes built a dominant business by being the only major public company with the regulatory approval to sell postage meters. But in 1999, the USPS started its ePostage program, granting a select few companies the license to offer postage online. Only 3 companies - Pitney, Stamps.com, and Endicia - were granted licenses, creating a government-mandated oligarchy in the industry.
You might expect the USPS to expand the program from there but... it hasn't. Those 3 companies remained the only license holders up until last year, when privately owned Shippo was granted a license after Stamps bought Endicia.
There are a few reasons for this, and the same reasons are why I don't think it is likely there will be many more licenses granted. For one, the USPS offers these services as well, so granting a lot of licenses could hurt their bottom line - not good for an agency losing almost $6 billion a year. Also, the government does not want the hassle and cost of having to validate and audit a whole phalanx of license holders year in and year out. An ability to print currency is not something it wants to hand out at will.
All of this essentially limits the competitive market for Stamps.com and protects their business. I do believe the USPS will grant ePostage licenses directly to the big platforms like eBay and Amazon, however I don't see this as a major risk because the biggest merchants cross-sell items on many platforms, where Stamps.com's one-stop integration is a huge advantage.
Valuation and Conclusion
At a 5.5% earnings yield and a 5.1% free cash flow yield, Stamps is valued at about market average multiples. Total debt-to-equity is under 40%, and interest coverage is a non-issue, so financial health is perfectly fine.
Warren Buffett always says he'd rather buy a "great company at a good price" than a "good company at a great price", and the former is what we have here. A market average valuation for a firm growing highly recurring revenues at 15-20% rates with strong regulatory barriers to entry looks enticing indeed. Stamps.com is an intriguing stock.
Other MagicDiligence Content
Joel Greenblatt and MagicFormulaInvesting.com are not associated in any way with this website. Neither Mr. Greenblatt or MagicFormulaInvesting.com endorse this website's investment opinions, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr. Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website. The information on this website is for informational purposes only and solely represents the views and opinions of the author. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind, nor can it be relied upon as the basis for stock trades. DON'T RELY SOLELY ON THIS WEBSITE'S INFORMATION OR STATISTICS! Please do your own research before buying. Alexander Online Properties LLC, the proprietor of this website, is not responsible in any way for losses or damages resulting from the use of this information. Alexander Online Properties LLC is not a registered investment advisor. All logos are trademarked properties of their respective companies.
© 2008-2017 Alexander Online Properties LLC