Fast growing small company – check.

Huge margins – check.

Cash machine – check.

No debt and healthy balance sheet – check.

Interested yet?

I’ll take you through how I analyzed this company and what my conclusion is.

The Retail Shipping Industry

I recently announced that my wife started her own eCommerce business and one of the big hurdles with any online store is shipping.

This isn’t the first time my wife and I tried an ecommerce store.

When we first started and an order came in, my wife would box things up and make a trip to the local USPS, stand in line and mail it out.

As you know, online orders don’t come in at the same time.

Being new to the whole online business thing and just happy to be getting some orders, my wife would make a trip maybe 2 or more times a day.

And if you’ve been to the USPS, you know how frustrating things can get when lines are long and people are slow.

So this was a huge waste of time. It’d literally take 30 minutes to ship out a package.

Funnily enough, this is very common.

With more people making a living off eBay Inc (NASDAQ:EBAY) and the Amazon.com, Inc. (NASDAQ:AMZN) marketplace nowadays, expect the number of packages being shipped to increase.

The Middleman – Stamps.com Inc. (STMP)

Stamps.com image

This is where a middleman service like stamps.com comes into play.

Instead of having to wait in line to buy the postage and ship the box, stamps.com allows you to pay for the postage online.

You then print out the shipping label, stick it on your box and simply drop off your package at the nearest location.

If you have enough volume, you can arrange USPS to come by daily to pick up your boxes.

You get all this by paying a small monthly fee to stamps.com.

Competition

Stamps.com Inc. (NASDAQ:STMP) is one of three vendors licensed by the USPS to sell postage. You won’t get more USPS reseller competitors so the obvious competition is really United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX).

UPS and FedEx are able to adapt to changes in the environment whereas USPS has to go through congress to make changes.

Both UPS and FedEx welcome new business accounts and it’s also very easy for business owners to go online to pay and print out labels. Once you start gaining some volume with either UPS or FedEx, they will negotiate some good rates for you.

It’s a win-win.

On the other hand, there’s no such thing with USPS. You pay what they charge and it’s not a scalable solution limited to smaller businesses.

Cash Cow Subscription Model

Stamps.com operates a SAAS (Software As A Service) subscription model which means that people pay monthly or yearly for the service.

If the service is valuable and helps people save time and energy it’s a no brainer for people to continue subscribing. By offering a product that helps you respect and maximize your time, it becomes a very sticky business for consumers.

Once a business model like Stamps.com gains traction and hits a certain number of customers to break even, it’s a huge cash cow from there.

Having been in business since the dot com era, Stamps.com Inc. (NASDAQ:STMP) is well established.

Just look at the FCF growth that Stamps.com has witnessed.

There is some serious fluctuation, (there’s a reason) but you can’t deny that this small company is a cash cow while trying to grow at the same time.

Stamps.com FCF
FCF and Owner Earnings in Millions

FCF and growth have fluctuated wildly over the years, but 2013 looks to be a breakout year with TTM numbers looking good also.

FCF is simply

FCF = Cash from Operations – Capex

Owner Earnings I’m using is;

Owner Earnings =
Reported Earnings (also known as Net Income)
+ Depreciation, Depletion, and Amortization
+ Other Non Cash Charges
– Capital Expenditures (if you can, use maintenance capex)
– Increase / (Decrease) in Working Capital

Using FCF to Perform a Quick Initial Valuation Filter

When I first load STMP into my stock analyzer, I’m greeted with this raw intrinsic value chart based on DCF.

Stamps.com Price vs DCF
STMP DCF Price to Intrinsic Value

Whenever I see a chart like this where the intrinsic value is much higher than the stock price, I immediately know that the company;

a) makes a ton of cash (explained above)

b) has a high growth rate

Checking in on STMP, I’m greeted with both A and B.

However the expected growth rate of 27% that I’m getting is too high for a company that hasn’t proven itself. Not worthy of such a high growth rate at the moment.

Over 5 year and 10 year period, the growth rates aren’t very impressive.

Stamps.com Cash flows
5yr & 10yr FCF Growth Rates

Only comes out to 8.8% over multiple rolling periods in the last 5 years.

It’s 6.2% when you take multiple periods throughout the past 10 years.

These two numbers are indicative of how cash growth has been volatile despite making so much money.

Now if I adjust the growth rate down to next years expected rate of 12%, the chart becomes much more reasonable.

Stamps.com DCF vs Price
Intrinsic Chart Updated

So there’s some hope.

But…

NOL’s Good or Bad?

One of the things that worry me about Stamps.com Inc. (NASDAQ:STMP) and the true health of the FCF is their NOL and tax credits.

It’s viewed as an asset when a business holds a a large NOL balance with a distant expiration date.

But in Stamps.com case, the NOLs are already expiring.

We have NOL carryforwards of approximately $200 million and $95 million for federal and state income tax purposes, respectively, at December 31, 2013 which can be carried forward to offset future taxable income. We have available tax credit carryforwards of approximately $4.0 million and $3.5 million for federal and state income tax purposes, respectively at December 31, 2013, which can be carried forward to offset future taxable liabilities. Our federal NOLs will begin to expire in 2020, and our state NOLs have begun to expire. The federal tax credits begin to expire in 2018. Under California law, California tax credits do not have an expiration date. – source

If the NOL was set to expire in 2020 like the federal NOLs, then this could be viewed as an asset.

However, in a few years, the NOLs will all be gone and Stamps.com will likely pay taxes in the 33% range.

That’s obviously going to affect the bottom line and drag down performance.

ShipStation Acquisition and the New Direction

At this moment in time, Stamps.com Inc. (NASDAQ:STMP) isn’t a bad stock.

In fact, there are some things going for it.

Their recent acquisition of ShipStation.com for $50m in cash was great.

ShipStation is an online shipping software solution to help manage online orders. They let users connect to stamps.com, UPS, FedEx and other carriers.

They also support Amazon Fulfillment so that ecommerce sellers can use Amazon’s fulfillment service.

Not only that, they

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