Avoid the Post Office With This Industry Leader

Despite the ease and popularity of online communication and electronic bill payment, there is still a need for postal mail. Stamps.com (NAS: STMP) aims to take advantage of this and continue to be the leading Internet postage company.

An impressive quarter
After posting some very impressive quarterly numbers, Stamps.com surged more than 26%, ending trading close to a new 52-week high. Net income for the recent quarter was up 52% over the same period last year, with revenues up 20%. The largest segment of this growth was in its PC postage business, the corporate segment of its business. By focusing on corporate and small-business accounts, Stamps.com should remain the leader in this small but growing industry.

Is growth ahead?
The U.S. Postal Service is a bureaucratic behemoth, an organization on the brink of bankruptcy. However, like the government's continued investment in the losing proposition that is Amtrak, the post office will be allowed to survive. As it executes cost-cutting measures, such as closing smaller post offices or stopping Saturday delivery, there is room for other companies to sell consumers postage.

It is not easy to become a licensed PC postage vendor. It takes around two and a half years to gain approval, and the USPS has not approved a new PC Postage vendor since 2000. Currently, there are only three approved PC postage vendors: Stamps.com, Pitney Bowes (NYS: PBI) , and Endicia.com, part of the office product division of Newell Rubbermaid (NYS: NWL) . Stamps.com was the first of the three to get approval from the USPS for its PC postage business, and currently accounts for 80% of all PC postage customers.

Who are these customers?
Stamps.com targets home offices, small businesses, and high-volume shippers with its PC postage service. For example, a person operating a home-based eBay (NAS: EBAY) or Amazon.com (NAS: AMZN) Marketplace business would use the service to mail out products sold to customers. Typically, these smaller packages can be handled within the constraints of the postal service without upgrading to costlier shipping from the likes of FedEx (NYS: FDX) and UPS (NYS: UPS) . Stamps.com customers also receive discounts on postal rates, package tracking, and insurance, as well as save time by not having to drive to the post office. This allows small-business owners to focus on their business and not waste time and money.

According to the USPS, postal service revenue in fiscal 2010 was $67 billion. Approximately $48 billion was represented by classes of mail that Stamps.com offers through its service. Even if postal revenues decline, Stamps.com is positioned to continue to make money as long as businesses need to send items through the mail.

What it all means
Because of its recent price surge, Stamps.com looks very expensive with a P/E over 30. That said, with projected EPS growth of 18% over the next five years, this number should continue downward in the future. The company has returned nearly $258 million to shareholders since 2002 in the form of special dividends and share repurchases, including a special dividend as recently as the fourth quarter last year. Finally, it currently has no debt on its balance sheet, giving the company room to borrow should it need to in order to grow further and gain more market share.

What do you think?
Stamps.com's recent performance moved it closer to becoming the perfect stock. If you are intrigued by the potential of this stock, I urge you to keep an eye on future developments by clicking here to add Stamps.com to your free stock watchlist.

At the time thisarticle was published Fool contributor Robert Eberhard owns no shares in the companies mentioned here. Follow him on Twitter, where he goes by @GuruEbby. The Motley Fool owns shares of United Parcel Service and FedEx. Motley Fool newsletter services have recommended buying shares of FedEx, eBay, and Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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