Miller Value Partners: “Pitney Bowes (PBI) Shares Remain Significantly Mispriced”

Miller Value Partners, an investment management firm, published its “Miller Deep Value Strategy” third quarter 2021 investor letter – a copy of which can be seen here. For the third quarter of 2021, the fund was down in excess of 10%, lagging the overall market and the S&P 1500 Value Index. The Deep Value Strategy remains well ahead of the market for the year, up in excess of 70%. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Miller Value Partners, in its Q3 2021 investor letter, mentioned  Pitney Bowes Inc. (NYSE: PBI) and discussed its stance on the firm. Pitney Bowes Inc. is a Stamford, Connecticut-based shipping and mailing company with a $1.2 billion market capitalization. PBI delivered an 18.99% return since the beginning of the year, while its 12-month returns are up by 25.73%. The stock closed at $7.33 per share on November 4, 2021.

Here is what Miller Value Partners has to say about Pitney Bowes Inc. in its Q3 2021 investor letter:

“Pitney Bowes (PBI) was also a recent laggard off nearly 20% during the quarter. The company has been building out an E-commerce business for the past 10 years that is approaching $2B in revenue and growing revenues longer-term at a double digit pace. With the E-commerce segment approaching scale, management has significant new initiatives underway to help improve the segment’s profitability to normalized levels (8-12% EBIT margins) over the next couple of years. Success on achieving normalized profitability for the segment would dramatically enhance Pitney Bowes earnings (>$1 in EPS) and annual free cash flow generation (>$250M). Last quarter we highlighted, the digital service business within Pitney’s E-commerce segment and the significant embedded value that was suggested by recent acquisition of a direct competitor at 8x revenue. However, another recent market transaction suggests the E-commerce business has even greater embedded value. At the end of the second quarter, Global-e (GLBE), a UK company that focuses on cross-border business came public at $25/share or approx. $4B market capitalization. The initial IPO price suggested, 2021 Enterprise value to Revenue >20x. Since the IPO, GLBE has climbed to greater than $50/share. Within Pitney Bowes’s E-commerce segment there is a much larger cross border business representing approximately $500M in revenue. The current valuation of Global-e suggests Pitney’s cross border business is worth significantly more than the company’s current market cap. With the marketplace valuing many businesses in excess of 10x revenue, we believe that Pitney Bowes shares remain significantly mispriced at only .35x of revenue and >30% normalized earnings and free cash flow yield. In our opinion, the shares are becoming increasing attractive as their E-commerce segment appears to be significantly undervalued and has the potential to unlock significant equity value over the next couple of years.”

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Based on our calculations, Pitney Bowes Inc. (NYSE: PBI) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. PBI was in 23 hedge fund portfolios at the end of the first half of 2021, compared to 21 funds in the previous quarter.  Pitney Bowes Inc. (NYSE: PBI) delivered a -5.05% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.