Value Investing News

At this point, readers of Value Investing News are probably pretty confused as both TheMarleyGroup story, Wax's comments, and now Wax's own piece are all on the site. Wax and TheMarleyGroup both use Value Investing News and I hope they will continue to do so. I appreciate it when someone corrects a mistake; however, I'd like to encourage both Wax and TheMarleyGroup to keep things from getting personal – or, if they do, to keep those sorts of things off Value Investing News.

Having said that, Wax has provided a valuable service here. According to Stamps.com's most recent 10-K, "cash" as of December 31st, 2006 consisted of:

Cash and Equivalents: $11,740,000

Restricted Cash: $554,000

Short-Term Investments: $21,314,000

Long-Term Investments: $72,466,000

Total: $106,074,000

So, Stamps.com had approximately $106 million in cash and securities. Normally, I would count all cash and securities – however treated by accounting rules – as cash and securities. The maturity date of the security is not the greatest concern.

The long-term investments of $72.466,000 consist of $43,331,000 in corporate notes and bonds and $29,571,000 in U.S. Government and agency securities.

Therefore, Stamps.com has approximately $106 million in cash and securities. Wax's mistake has been made by many financial sites. I know, for instance, that Morningstar made the exact same mistake – so, wherever they get their data from also fails to reclassify long-term investments as securities.

To Morningstar's credit, it provides a link to the SEC filings, and anyone who opens the 10-K would see the numbers I've cited above and quickly understand the confusion. This is a discrepancy caused by accounting – nothing else.

Stamps.com had 21,862,552 shares of common stock issued and outstanding on February 28, 2007 – so as of that time the company had $4.88 a share in investments. That is the number I suggest using when calculating the value of the stock, the operating business, and the investment portfolio.

I hope I've helped settle this matter, because I actually emailed the TheMarleyGroup after I read the piece and complimented him on actually reading the 10-K instead of relying on inaccurate data published all around the web. I hadn't read Stamps.com's 10-K before reading TheMarleyGroup's piece. So, I would have only seen the incorrect financial data disseminated by financial websites.

Anyway, I hope this clears up any confusion, but as always – please read the 10-K for yourself, don't rely on my comments here.

I was enjoying Mr. Urgo’s analysis of the company until he got to the $106 million in cash part, which he says he got from the company's most recent 10-K filing. I read through the filing and low and behold I couldn't find $106 million in cash anywhere.

What I did find was a company that had a year over year (2006-2005) 17.54% decrease in cash, a 37% increase in sales, a 43% increase in cost of goods sold, a tangible book of $4.52, a return on invested capital of 15%, a net income after taxes rate of 15.5%, free cash flow of $0.71, and oddly enough, a 2006 effective tax rate 0.96%, which is an almost 50% decrease from 2005.

I also learned that Mr. Urgo failed to mention that the company is involved in several legal proceedings.

One is with Kara Technology in which Stamps.com is alleged to "infringed certain Kara Technology patents and that Stamps.com misappropriated trade secrets owned by Kara Technology, most particularly with respect to our NetStamps feature".

In addition there are legal proceedings with Endicia, Inc. in which Stamps.com alleges patent infringement and Endicia, Inc. alleges that the patents aren't valid, as well as a class action lawsuit alleging violations of the 1933 Securities Act.

I guess M. Urgo didn't feel that this information was significant enough to warrant mentioning it?

Mr. Urgo also failed to mention that in some cases executive compensation...."Includes (i) make-up payments from the loss of intrinsic value in stock options following the Company’s $1.75 return of capital dividend and (ii) contributions to our 401(k) plan that we made on behalf of the named executive officer to match a portion of his elective deferred contributions to such plan."

Does this mean if I invest and the value of my investment falls, the company is going to help me as well?

I found that analysts have pegged 2007 earnings growth for the company at 21%, but Mr. Urgo didn't really explain what he thought 2007 earnings growth would be, so I wonder what will happen to the price of the stock if the company doesn't meet or exceed this number?

As I said at the outset, I could not find the $106 million in cash number anywhere in the company filings, and what's more, I don't think Mr. Urgo did either.

In his analysis he mentioned that the company has a market cap $323 million and $106 million in cash. He goes on to say that the company has an enterprise value of $15 a share.

Here's the deal. Simply stated, Enterprise value is market cap plus debt minus cash. Based on Mr. Urgo's numbers, that would be $323 minus $106, or $217 million. Then when I add in the company's debt, which is $0 million, I get $217 million, and when I divide the 217 by the number of diluted shares I found which is 24.03 million, I get an enterprise value of about $9, which makes me wonder how Mr. Urgo arrived at $15?

As far as I'm concerned, Stamps.com, Inc. (Nasdaq: STMP) has a reasonable value of $10-$12. I would place a buy target at $5 and be happy with a sell target in 3 years of $12-$15.

With the loss of electronic communication in the future, no more e-mail, no more fax machines, no more PDAs, no more telephones, etc., I guess Stamps.com, Inc. will become the defacto standard for postage. However, until that time arrives I think I'll just pass on this stock recommendation.

Wax