Saturday, February 11, 2012

Pitney Bowes (PBI) and Consolidated Graphics (CGX); struggling to increase their top lines?

As most Reprographers are aware, Pitney Bowes (NYSE: PBI), is not just in the postage meter business, PBI operates one of the largest Managed Print Services (FM) businesses in the U.S. (known as PBMS, or Pitney Bowes Management Services.)

Years ago, when I first researched PBMS, I found, with one exception, that PBMS was not a player in the “reprographics” staffed FM (OnSite service) business. That one exception was a deal that PBMS had with a New Jersey A/E firm; if I’m recalling this correctly, that deal was with the Hillyer Group. Since then, I’ve not seen them active in the A/E/C marketplace. (That does not mean that they are not active in the “reprographics” marketplace. It just means that I, personally, have not heard anything about PBMS doing deals with A/E/C firms.)

To go on, the other day, Feb 9th, Consolidated Graphics (CGX) reported that its revenue for the December 2011 quarter was $283.9 million, a $15.2 million or 5.1% decrease compared to the prior year quarter. The decline in revenue compared to the prior year quarter was due to an expected $11.3 million decline in election-related business, a 3.5% decline in same-store sales, partially offset by sales growth related to acquisitions. Not a particularly good quarter for CGX, especially considering that GDP was up in Q4.

Yesterday, Feb 10th, Morningstar Research said this in a note to investors about Pitney Bowes’ recent earnings release:

Pitney Bowes' PBI fourth-quarter (2011) earnings results were boosted by a sizable gain resulting from a settlement with the Internal Revenue Service related to discontinued business operations. Excluding this one-time benefit, quarterly operating results confirmed our concern that continued investment in no-moat business lines is eroding Pitney's overall return on invested capital. Quarterly revenue decreased year over year by about 6.5%, with all business segments posting declines except for international mailing (up 1%) and marketing services (up 4%). The historically fast-growing software segment stumbled this quarter, reporting the largest segment decrease of 10%. Management explained that the software division was unable to close several deals in its sales pipeline within the quarter. Although management said this trend should turn around over the next few quarters, we remain cautious. We believe this segment needs to improve in order for Pitney to realize any material growth. These developments are negative, and we will watch how this trend develops into 2012. Operating margins before interest and tax for the quarter were much lower than we anticipated, coming in at about 3% (including goodwill impairment) versus 10.9% during the same period last year. Excluding impairment, quarterly operating margins still fell 160 basis points year over year. Overall full-year results also fared a bit worse than our forecast, as total revenue declined 2.7% and operating margins contracted to 9.5% from 11.9%. In our view, the nonrecurring tax benefit is not a high-quality, sustainable driver of earnings; we would have preferred to see improvement come from core business operations. Company guidance for 2012 predicts stronger sales in the enterprise business segment, which includes the lower-margin, no-moat business lines that continue to weigh on the company's overall profitability. This unfavorable mix shift coupled with additional investment in Pitney's new Volly platform is already expected to affect operating margins in 2012. In addition, we continue to expect weak capital spending trends in Pitney's target markets, which may hamper top-line growth near term. Even though core quarterly results were slightly lower than our expectations, our long-term assumptions are intact and we reaffirm our fair value estimate.
 Barbara Noverini

Both CGX and PBI are involved in the printing-services sector. Are their struggles to grow their top lines just attributable to a lackluster economy? Or, are their struggles to grow their top lines driven by companies finding ways to print less?

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