Stamps.com (NASDAQ: STMP), Agressive Growth at a Reasonable Price

Stamps.com (NASDAQ: STMP) Agressive Growth ad a Reasonable Price

Stamps.com (STMP) is a consistent earnings performer, beating consensus expectations over the last few quarters. Its products and services include the United States Postal Service (USPS) approved PC Postage Service and PhotoStamps. The PC Postage Service enables users to print electronic stamps directly to envelopes, plain paper, or labels through personal computer, printer and the Internet. Meanwhile, PhotoStamps is a patented postage form allowing customers to turn digital photos and images into a valid United States postage.

The company recently issued its third quarter results for 2012.  It reported core PC postage sales of $27.7 million, up 20% compared to the same period last year. This translates to operating margins of 28.8%, higher than the previous year’s operating margins of 21.8%. Net income for the period amounted to $7 million or $0.42 diluted earnings per share. Excluding one-off items, net income would have been at $8.3 million or $0.50 diluted per share. This is a growth of 49% from the prior year’s results and beats analyst expectations of $0.38 earnings per share.

It recently increased its guidance for the current fiscal year. It expects revenues in the range of $110 to $120 million, higher than the previous guidance of $107 to $117 million. Adjusting for one-off items such as stock-based compensation, relocation expenses and non-cash benefits, earnings per share are forecasted to be up from $1.55 to $1.75 per share. This is also higher the previous guidance of from $1.35 to $1.55 per share. It seems that Stamps.com has continued its strong historical financial performance. For the last 10 years, revenues have grown by 18% a year. This translates to earnings growth 9% for the same period. Its free cash flow has significantly improved from $1 million in 2002 to $14 million in 2011.

Earnings Blowout

Stamps.com has beaten consensus estimates over the last few quarters. Since the second quarter of 2011, earnings per share have beaten market expectations. The only exception is its performance for the second quarter of 2012, missing earnings estimates by $0.03 per share. During this period, it has single-handedly beat estimates by wide margins.

The company has achieved all-time record levels of paid customers of around 419,000 as of the third quarter of this year. Its monthly subscriber revenue per paid customer also achieved record levels. In terms of revenue growth breakdown, its total postage printer customer increased by 78% compared to the previous year. Meanwhile, its core PC postage achieved a 20% year-on-year growth.

Despite these impressive growth rates, the stock trades at undemanding valuations of 13.7 times forward earnings. This is lower than its 5-year average of 23.3 times. In terms of price over growth, it can be considered cheap at 0.7 times. These valuations do not reflect the company’s strong barriers to entry and high returns on capital. Going forward, management believes that its customer base will continue to expand and would translate to incremental revenues. Furthermore, there is enough margin of safety from this stock. It has a cash balance of around $51 million, equivalent to 11% of its market cap. This provides enough cushions to withstand a tough operating environment.