Stamps.com, Inc. (STMP)

Stamps.com





Two Key variables:


1.   Low capital requirement (high return on capital). Stamps.com actually provides a software service to its customers. The PC stamp business does not require any material on STMP’s side.


2.   Superior customer cost benefits in terms of both cost and convenience. Vast growth potential.








Summary


1.   Large market opportunity ($65B US postage, 22M SOHOs)


2.   Significant barriers to entry exist (USPS approval process 2.5 years)


3.   Category leader in PC Postage and Customized Postage, 80-85% market-share.


4.   Superior customer benefits at prices up to 80% less than meters


5.   New market opportunity with PhotoStamps


6.   Recurring revenue model with solid revenue growth, >40% last five years.


7.   Leverable fixed cost.





Revenue and earnings growth in past 8 years.


   1999   2000   2001   2002   2003   2004   2005   2006


Revenue   0.4   15.2   19.4   16.3   21.2   38.1   61.9   84.6


Earning   -56.5   -209.6   -223.4   -6.8   -9.3   -3.7   10.4   16.5


yoy revenue growth       3700.00%   27.63%   -15.98%   30.06%   79.72%   62.47%   36.67%





Growth drivers


1.   Expand customer base.


2.   Growth of photoStamps.


3.   Adoption of multi-user product by larger businesses.





Conservative Accounting:


1.   Advertising costs and promotional costs are expensed as occurred, although revenue is earned over the customer’s lifetime.





Under promise and over deliver:





2002 forecast for 2003:


   Revenue 20 million


2003 actual result


   Revenue 21.2 million





2003 forecast for 2004:


   Revenue 28.6 million


   Net loss: 8 million


2004 actual result:


   Revenue 38.1 million


   Net loss 4.7 million





2004 forecast for 2005:


   Revenue 48.5 million


   Net income $0.26/share


2005 actual result:


   Revenue 61.9 million


   Net income $0.44/share





2005 forecast for 2006:


   Revenue 75-90 million


   Net income 0.53-0.63/share


2006 actual result:


   Revenue 84.6 million


Net income $0.69/share





2007 forecast for 2008


Revenue 87-97 million


Net income $0.77-0.87/share   (including stock option expense)





Valuation:


Market cap: $295 million


Cash :$110


EV: $185





2006:


Revenue: 84 million


Cash Flow: $18 million


Cash: $110





2007:


Revenue: 95 million


Cash Flow: $21 million


Cash: $131





2008:


Revenue: 110 million


Cash Flow: $25 million


Cash: $156





Value = 20x$25m+$156m = $656m


Option on higher return of cash (acquisitions, share buy back).


2-3 year target Price: $30





PE


5/16/20007 price $13.5.


Cash per share =106m/23m=$4.6





2007 projected earning $0.80/share


2007 forward PE=$8.9/0.80 = 11











2007 IV:





Cash on hand = 106 m


(200 million NOL)


NPV of NOL = 70 m


EV = 295-106-70=119m


EV/FCF=6





Recapitalization Valuation:


Assume they used $110 mil in cash to buy back shares, and they could do it in one slug at today’s price of $13.50. They would buy 8.15 mil shares. They would have 13.77 mil shares remaining. They would lose the interest they are earning on their cash, so free cash flow would drop to around $14.8 mil. So FCF would be roughly $1 a share, meaning the biz would be trading at 13.5 times free cash flow, which is a good bit cheaper than the average market multiple. Let’s say sometime in 2 years they get a value of 18 times, and free cash flow doesn't grow at all. We would have an $18 stock, or about 35% total return.