Of Mice and Men and Pitney Bowes $PBI

“And I get to tend the rabbits.”

In my last article, I claimed it was a lack of decisive action that led to the bankruptcy of Vertex Energy (VTNR).  I am pleased to write today about a management team that is not afraid to take decisive action to save a business.  Pitney Bowes (PBI).

Pitney Bowes has been on my short list to write up for a while, I had been on the lookout for logistics companies due to my macro view that we are at the end of a destocking cycle and logistics volumes are positioned to accelerate.  This is what led me to Forward Air (FWRD) initially.  For a quick review of the end of destocking thesis, you can find it here.

Pitney Bowes has been suffering under the stereotypical abusive management team, complete with a CEO who spent more time on the golf course than in the office.  Net Income peaked in June of 2012 at $690 million:

An activist fund, Hestia of GameStop fame, contacted PBI management to discuss making some changes.  Hestia does not primarily engage in hostile takeovers, they prefer to work with current management, however, upon receiving communication from Hestia, the CEO immediately spent a million dollars hiring consultants to try and protect himself from activist investors.  Since peace was never an option, Hestia engaged in a proxy battle and replaced the entire management team and board of directors this past May.  Since that time, they have been implementing their turnaround strategy for PBI.  

Pitney Bowes is a 104 year-old integrated logistics company with an emphasis on mail and parcel shipping.  With the poor company performance, the common sentiment is that they are facing obsolescence with the decline in snail mail.  However, PBI bulls believe the decline in the business was solely due to past management, and the rise in parcels more than offsets the decline in mail.  Pitney Bowes provides logistics services to 90% of the S&P 500, and as I learned analyzing FWRD, these clients are sticky.  It would take a lot for a large institution to change their primary mail logistics partner. Hestia has two primary criteria for an investment, low valuation and a strong moat, so clearly they believe in the stickiness of their major corporate clients.

PBI has three major business subdivisions, as well as a wholly owned bank to finance their clients.  The three major subdivisions are SendTech shipping and mailing technology, services, and supplies, Presort enables clients to integrate with the USPS for discounts, and Global E-commerce provides domestic and international delivery, returns and fulfillment.  SendTech had $320 million in revenue last quarter with 34% EBITDA margins.  Presort had $147 million in revenue last quarter with 24% EBITDA margins.  Global E-commerce (GEC) had $326 million in revenue last quarter with negative -5% EBTIDA margins.  GEC has never been profitable, and it is a cashflow trap for maintenance capex.    In 2023, GEC lost $136 million.

Hestia has a four point turnaround strategy meant to get the Pitney Bowes share price to $15.

The first part of this strategy is the strategic review and solution to the GEC money pit.  That strategic review was completed in August, and the final decision was what Lennie did to George in John Steinbeck’s Of Mice and Men.  Management decisively determined that the business was not savable, and that more money would be lost in the time it took to find a buyer than just to close the subdivision immediately.  Majority ownership of GEC was transferred to a liquidation specialist, and the GEC subdivision immediately entered Chapter 11 bankruptcy proceeding this past August.  Note, PBI is not going through bankruptcy, their subdivision as a separate entity is being liquidated through bankruptcy. 

PBI expects to incur costs of no more than $150 million to completely retire all liabilities of the GEC business.  This includes $45 million of debtor-in-possession financing, some of which might be recovered after the bankruptcy process concludes in early 2025.  But management is warning that bankruptcy processes have unforeseen events and is not counting on that $45 million in their guidance.

The second initiative in the turnaround strategy is cost savings and efficiency.  PBI found $70 million annual savings so far, mostly due to headcount reduction, and has a goal of finding between $140 million and $160 million annual cost savings to drive an improvement in profitability and margins.  Management claims that this cost cutting has been done with a thorough risk analysis, and should not result in a decrease in revenue.

The third initiative is cash management, PBI has already repatriated $100 million in cash from foreign subsidiaries who can get by on much less working capital.  Management is guiding toward repatriation of another $25 million and believe that they can find another $115 million in working capital to release from efficiencies through their wholly owned bank subsidiary.  This $240 million working capital release is the source of the funds being used to retire the GEC division.

The fourth initiative is deleveraging PBI, reducing the high cost debt burden and lowering cost of capital through an improved credit rating.  Pitney Bowes has over $2.1 billion in long term debt, $261 million matures in March 2026, and $272 million is at SOFR +6.90%.  

I would caution investors, however, to not expect too much debt retirement. Reading between the lines of management’s deleveraging plan, from one perspective, increasing EBITDA lowers the debt / EBITDA ratio and can be considered deleveraging.  It is not clear that management is eager to pay down this debt significantly.  In fact, management even mentioned potential M&A targets.  I believe that management’s vision of “deleveraging” consists of increasing EBITDA, improving credit ratings, and refinancing debt to lower interest expense, but with a minimum of debt paydown.  This doesn’t bother me, it’s a fine way to get PBI to Hestia’s $15 price per share target.  But don’t be surprised if free cash flow goes toward M&A and share buybacks despite a stated goal of “deleveraging.”

Management is guiding toward $340 million to $355 million of full year 2024 EBIT, compared to their current market capitalization of $1.278 billion, and enterprise value of $3.11 billion.  Trailing 12 month interest expense is $178 million.  So comparing the $165 million remaining EBITDA after interest expense, the current multiple is about 8x market capitalization to EBITDA minus interest, or 9x enterprise value to EBITDA.  Not as cheap as it was before the Hestia hostile takeover, but still cheap compared to other logistics companies who trade at higher multiples still. 

Thinking about price to sales multiples, with the dissolution of GEC, revenue is projected to fall by around $1.3 billion, bringing sales from $3.3 billion down to $2 billion. Getting to Hestia’s target of $15 per share would require a price to sales multiple of over 1x, which PBI has not seen in recent history, with the previous high in price to sales being 0.90x in 2014.  

Regarding price to earnings, management laid out a pathway toward $480 million of annual EBITDA run rate after the dissolution of GEC and the full implementation of cost cutting measures.  If debt were refinanced to a reasonable interest rate, at the current debt burden, PBI would still have $150 million annual interest expense.  Leaving some room for taxes, that could provide about $1.50 of annual earnings per share.  To reach Hestia’s $15 target price, PBI would need a price to earnings ratio of 10x, which it has rarely seen in recent history, hovering closer to an 8x or 9x.  

In order for Hestia to reach their price target in the near term, not only is PBI going to need a couple years of organic growth, but operating cash flow is going to have to be deployed to help reach that target.  Either through strategic M&A, share repurchases, or maybe even paying down the highest interest rate debt.  Also, once the revenue run rate collapses from $3.3 billion to $2 billion, with the dominance of quantitative trading strategies there is a lot of opportunity for the share price to fall before it climbs back up.  The share price is elevated now on the euphoria of the hostile takeover and decisive plans.  But if those plans require a couple of years, and that’s a lot of opportunities for dips to buy.  

Buying today is probably a reasonable investment that will double within two years.  If the market provides a buyable dip, however, I would love to be able to buy more PBI at under $6 a share so that those dollars have a decent chance to 3x in the medium term.