Brean Thinks Pitney Bowes Has The Trifecta: Earnings, Free Cash And Organic Potential

• Pitney Bowes Inc PBI shares are down 15 percent year-to-date, although they have appreciated by 5 percent since September 10.
• Brean Capital’s Ananda Baruah maintained a Buy rating on the company, with a price target of $30.
• The company’s organic growth potential, increased capital returns and FCF growth make the stock very attractive, Baruah believes.

Analyst Ananda Baruah said that FCF growth and increased capital returns are expected to emerge as important catalysts for Pitney Bowes’ stock in FY16.

The company expects its FCF generation to increase significantly from “current $450M -$525M levels (12% FCF yield) to $520M - $625M (14% yield) before accounting for any impact from organic growth.”

Baruah expects the company to deploy $150 million for dividends and $100 million for buybacks. The remaining amount of at least $320 million could be invested into M&A or reduce incremental shares

Pitney Bowes has projected its organic revenue growth in 2016 and 2017 at 1-3 percent. Baruah estimates this to add an incremental $0.02-$0.12 to the company’s EPS in both the years.

Brean Capital noted that Pitney Bowes’ North American SMB mailing business is currently declining. The company expects the situation to improve in view of its recently completed sales transition, implementation of web-based sales processes and introduction of new digital based Enterprise functional features.

The company is also initiating cross-selling across its digital commerce portfolio into its core SMB base.

Pitney Bowes is expected to benefit from the recent acquisition of Borderfree Inc BRDR in terms of increased EBITDA and access to the large and growing market of ecommerce shipping. The company expects the deal to be accretive within 15-18 months and be cash flow positive within five years.