Poor Quarter Envelopes Internet Postage Business

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Stamps.com’s first quarter earnings did not deliver the results investors wanted and the El Segundo company’s stock took a licking.

Shares of Stamps.com plummeted 17 percent the week ended May 7 to close at $28.88, making it one of the biggest losers on the LABJ Stock Index. (See Page 82.)

Stamps.com reported net income for the quarter of 50 cents a share, which was 3 cents a share below analysts’ estimates. It also missed on revenue, earning $33.3 million compared with analysts’ estimates of $34 million.

Chief Executive Kenneth McBride attributed some of the quarter’s struggles to the broader economy.

“Our first quarter results come against a background of a continued challenging economic environment for small businesses,” McBride said during the conference call on earnings.

Kevin Liu, an analyst who covers Stamps.com for West L.A. investment bank B. Riley & Co., reduced his price target on the company from $36 to $32.75 after the earnings release. However, he does not believe the earnings signaled a long-term downward trajectory for Stamps.com, citing management’s stated desire to spend more money on customer acquisition in order to grow the business.

“Although not readily apparent from our model and price target adjustments, we believe first quarter results were a positive step towards reaccelerating revenue growth given management’s willingness to invest further,” Liu wrote in his report on the company.

Liu said the market’s negative reaction to the earnings miss represents an incomplete view of the company’s prospects.

“The market may well focus on the headline miss and (earnings per share) cuts, thereby overlooking the benefits that should accrue over the long term,” he wrote.

Stamps.com was the beneficiary of a September 2011 announcement by the U.S. Postal Service that it would be closing branches and cutting back on service. At the time, it was believed that would create a bigger demand for the business, which sells postage online that can be printed and taped to a package. Shares rose to a five-year high of $49.40 in November.

George Sutton, who covers the company for Minneapolis investment bank Craig-Hallum Capital Group, also lowered his price target, from $42 to $37. He raised some concerns about Stamps.com in his postearnings report, citing the company’s vulnerability to the USPS. A recent move by the Postal Service to provide free insurance on packages worth less than $50 has put a dent in Stamps.com’s insurance sales, for example.

“The Postal Service has suffered from a weakening financial position and may make strategic decisions that could potentially be harmful to Stamps.com’s business,” Sutton wrote.

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