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Pitney Bowes (PBI) Hit by Rising Expense, Poor End Markets


Earlier this month premium global eCommerce solutions provider, Pitney Bowes Inc. PBI, reported its second-quarter 2017 results, which came in below expectations. The company reverted to its dismal earnings miss trend after posting a solitary earnings beat last quarter. Further, investors were miffed as the company tweaked its full-year 2017 guidance.

Year to date, the stock has lost 13.9%, in stark contrast to the industry’s average positive gain of 21.6%.

Also, analysts are showing no favor toward the stock as the Zacks Consensus Estimate for full-year 2017 earnings has gone down from $1.75 to $1.72. Given its array of problems, we believe that Pitney Bowes investors are in for an even bumpier ride. Let’s take a deeper look at factors plaguing the company.

Lingering Softness in Mailing Business

Prolonged weakness in the company’s North American mailing business is proving to be a significant drag on the top line. During the second quarter of 2017, Small and Medium Business (“SMB”) Solutions revenues dipped 3% year over year to $436.4 million. The tepid performance was due to softness in the North American Mailing business (down 1%) and International Mailing Business (down 11%).

This segment continues to suffer from lower recurring revenue streams and rental revenues. Additionally, a waning recurring revenues trajectory and poor equipment sales are making matters worse. Uncertain global economic environment is expected to impact production mail and software businesses in the near term, thereby limiting the company’s growth momentum.

Precipitous Decline in Software Sales

Though Pitney Bowes adopted multiple measures to boost profits at the software segment, its taking much longer than expected for the results to show. In general, licensed software businesses are always susceptible to swings based on large transactions. Given the scale of Pitney Bowes’ business, it remains vulnerable to those swings.

Currently, the company is focusing on driving growth by penetrating into new areas. However, this has put the margin performance under pressure in the short run.

Escalating Costs

Pitney Bowes has been experiencing a surge in its operating expenses on account of ERP implementation in the U.S. and higher marketing expenses in relation to aggressive advertising and marketing strategies for strengthening brand value. The company expects marketing expenses to be up on a year-over-year basis.

In addition, it expects incremental marketing expense in the ERP program, related to digital capabilities enhancement, for entire 2017. Also, capital expenses associated with the ERP project remain a drag. Til the benefits of ERP materialize, the Zacks Rank #4 (Sell) company is expected to incur higher capital expenses that might exert pressure on margins.

Stocks to Consider

Some stocks in the broader sector include Applied Optoelectronics, Inc. AAOI, Red Hat, Inc. RHT and Applied Materials, Inc. AMAT. While Applied Materials sports a Zacks Rank #1 (Strong Buy), Red Hat and Applied Materials hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Optoelectronics has a whopping average earnings surprise of 21.0% for the trailing four quarters, beating estimates all through.

Red Hat, Inc. has a robust earnings surprise history, with an average positive surprise of 11.1%, driven by consecutive earnings beats over the trailing four quarters.

With four back-to-back beats, Applied Materials has an average positive surprise of 3.5% for the trailing four quarters.

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