BriefkastenIn two articles we have already said a lot about Francotyp-Postalia. In the first article, we get to know the Berlin-based company that we are visiting at ValueWeekend 2018 from an investor perspective. In the second article, we took a closer look at the business model and the products. The two competitors of Francotyp-Postalia, the French Neopost and Pitney Bowes from the United States, always played a role in the background. That’s why we want to focus here from a Value Investing perspective on Neopost and Pitney Bowes.

A small comparison of the three companies

In the previous two articles, we have already learned that Pitney Bowes and Neopost have their strengths more in the segment of larger franking machines. It also seems that, unlike Francotyp-Postalia, the two companies are investing very little in modernising their own machines.

For a more detailed comparison, I would like to take a look at the figures:

Pitney Bowes Value Investing, Neopost Value Investing and Francotyp-Postalia Value Investing
Source: https://marketscreener.com/

Pitney Bowes and Neopost appear to be significantly more profitable than Francotyp-Postalia. Pitney Bowes in particular has a significantly higher level of debt – although a glance at these figures alone can be deceptive. The franking machines can have debts “on paper”. But these can be covered by the revenue from the leased franking machines.

Neopost: Franking machine manufacturer from France

Neopost.com – Investor Relations

How is Neopost’s business developing?

In 2017, Neopost generated 48% of its revenues in Europe, 44% in North America and 8% in the rest of the world. While the traditional letter mail business is expected to shrink by 2-4% in the next few years, the Communication & Shipping Solutions segment has developed dynamically in recent years. In 2011, the share of sales was still 8%. It currently accounts for 28% of total sales. 72% continue to come from the “classic” mail business.

Neopost Value Investing - New Actitivites
Source: Neopost annual report 2017, p. 44

However, the margin in the new business areas is significantly lower than in the mail business. The EBIT margin in the Mail Division, for example, is 22%, while the new “Enterprise Digital Solutions” (EDS) business unit only achieves a margin of 12%. In this new business area, Neopost offers solutions for the quality assurance of (address) data. GMC Software, acquired in 2012, and icon Systemhaus GmbH, acquired in 2016, also contributed to sales.

Margins in the new and smallest segment “Neopost Shipping” are even negative with 57 million € turnover. In 2017, several million € in losses were written here. Under Neopost Shipping, Neopost offers Packcity parcel lockers under the brand name. They also sell the CVP-500 packing machine:

The shrinkage of the profitable mail business and the growth of the more unprofitable new areas are contributing to the fact that the company’s overall margin is deteriorating somewhat year after year. In 2015, the EBIT margin was 20%. In 2017 it fell to 18%.

What does the network say about Neopost?

For Neopost, Wallstreet Online also has a thread for discussion, but it is much less productive than Francotyp-Postalia. Stefan Mohr’s blog already discussed the French company in 2013. There are also some articles about the French on Seeking Alpha under NPACF and NPACY. Two posts can also be found in the Value Investors Club. The first is from 2004 and the second from 2013.

Who is invested in Neopost?

Neopost also has value investors in its investor lists. The Swiss BWM holds 4.2% of the company through its funds. A short investment thesis is given in this interview:

With Neopost and Pitney Bowes, for example, we have two manufacturers of invoicing machines in our portfolio. We bought the papers extremely cheaply. Because e-mails are sent instead of letters, the companies and shares came under pressure. But both companies use their market knowledge and reposition themselves as service providers in the booming parcel business, keyword Amazon. They are transforming themselves from victims of digitalisation to profiteers.

Further explanations can be found in the commentary of the Classic Global Equity Fund from Q1 2016:

The French company Neopost produces franking machines which SMEs use to send invoices and personalised advertising letters. Together with the American Pitney Bowes, Neopost dominates the market for such machines and achieves correspondingly high margins. It is well known that letter volumes have been declining for years, but last autumn the company announced that it expects a higher decline in future than previously assumed. As a result, the share price fell to an attractive level. Pitney Bowes has proved that margins can even be increased through cost-cutting measures, even if turnover falls significantly. We expect Neopost to be able to do the same. It also offers new solutions for customer communication and parcel delivery. These are so successful that the company as a whole will soon be able to grow again. Even more important for us is that these activities are very profitable. We see the fair value of the share at EUR 35.

The name Neopost also appears again and again in connection with Max Otte and the British value fund Kennox.

Pitney Bowes: Big Player from the USA

PitneyBowes.comInvestor Relations

How is Pitney Bowes’ business developing?

Pitney Bowes has its focus in the United States. In 2017, 77% of sales were made in the United States. Only 23% come from the rest of the world. Sales are broken down into the segments “Small & Medium Business Solutions”, “Enterprise Business Solutions” and “Digital Commerce Solutions”. Small & Medium Business Solutions” includes “North America Mailing” and “International Mailing”, which accounted for 38% and 11% of sales respectively in 2017. “Enterprise Solution” includes “Production Mail” and “Presort Services” with 12% and 14% of revenues respectively. “Digital Commerce Solutions” consists of “Software Solutions2” and “Global Ecommerce” – with 10% and 16% of sales respectively.

According to the categorization of Pitney Bowes, 40% of the business areas are currently growing. In the long run they want to grow in 2/3 of the business. The aim is to achieve an EBIT margin in the mid ten-digit range through the business segments. In particular, the company intends to grow again in the future by focusing on the growth areas of e-commerce and parcel logistics. Cloud solutions for companies and Software as a Service (SaaS) are also important buzzwords for the future.

Pitney Bowes Value Investing - Goals
Source: Investor Relations Overview August 2018

This presentation by CEO Marc Lautenbach is also very interesting to explain. There he also discusses the changes in the company’s culture:

If you want a short version, you can watch this Mad Money talk from 2014 or 2017:

What does the net say about Neopost?

There is also a thread about the American Pitney Bowes at Wallstreet Online. There are also some analyses on Seeking Alpha.

Who is invested in Pitney Bowes?

In the DACH area I only know one investment of the Swiss BWM in Pitney Bowes. In this interview from June 2016 you explain why the funds are invested in the American company:

As the management recognized the problem of the declining core business, it began to invest in related, strongly growing business areas. Pitney now also offers its 900,000 SME customers parcel shipping solutions or helps large retail chains such as Macy’s or Harrods with cross-border e-commerce offerings. We expect Pitney Bowes to achieve double-digit growth rates in these areas. In our estimation, the company as a whole should also return to organic growth in the course of the next few years. In this case, however, a P/E ratio of 10x would no longer be appropriate, but rather multiples of 12-13x.

This Handelsblatt interview also gives an assessment of Pitney Bowes:

Finally, the US franking machine manufacturer Pitney Bowes – a victim of the Internet. It is well known that the volume of letters has been shrinking for years. Since Pitney controls 80 percent of the US market, the company was nevertheless able to generate high cash flows and even increase margins thanks to cost reductions. The stock market overlooks the fact that the company should grow again in the future thanks to new offers in packages and software. We see the price at 20 US dollars rather than 13 at present.

Neopost and Pitney Bowes: The competitors of Francotyp-Postalia
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