Options Trade of the Week  Stamps.com Inc.
(NASDAQ:STMP) Calls
Monday, August 25, 2014

**OPTIONS TRADE OF THE WEEK: Buy the STMP Nov 2014 35.000 call (STMP141122C00035000) at or under $1.60, good for the day. Place a protective stop limit at $0.65 and a pre-determined sell at $3.00.

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by Ian Harvey

August 25, 2014

Introduction

Financial leverage is one of the biggest benefits of trading options. Leverage is created by making your investments work harder for you to maximize profit. In other words, leveraging is creating potential for bigger gains using a smaller amount of capital.

Financial leverage is usually created by using other people’s money in an effort to maximize future profits. Mortgages are used to invest in real estate, and companies borrow money to expand operations. The benefit of the leverage comes from increased property value, or higher company revenue which raises the value of stockholders’ shares.

For the investor, however, buying options provides inherent financial leverage. Without needing to use borrowed capital, by investing in options, you can control a larger number of shares for the same initial investment, than if you purchased the shares themselves.

Stamps.com Inc. (NASDAQ: STMP), a provider of Internet-based postage solutions, definitely fits into this leveraged category and to top it off it also looks like it could be on the verge of a breakout.

The Middleman is Stamps.com Inc.

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.

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.

The Company’s customers use its service to mail and ship a variety of mail pieces, including postcards, envelopes, flats and packages, using a range of United States Postal Service mail classes, including First Class Mail, Priority Mail, Express Mail, Media Mail, Parcel Post, and others. As one of only three vendors licensed by the United States Postal Service (USPS) to sell stamps, the company is part of an oligopoly that includes FedEx (NYSE: FDX) and UPS (NYSE: UPS). While the latter names are strong companies, they're more aligned with the transportation industry, while STMP is a pure play on online postage services.

The secret is its monthly subscription model, in which customers pay a fee in order to use its services in addition to postage costs. This business model works well for a company with little overhead like Stamps.com, giving it wide profit margins -- over 35% in this case.

Due to the company's online business structure, it carries no short-term or long-term debt, giving it the ability to easily make acquisitions like the $50 million purchase of ShipStation, an online shipping software company.

Technical Details

STMP trades at 13 times forward earnings with a long-term annual EPS growth rate of 20%. The price-to-earnings-to-growth (PEG) ratio compares the P/E ratio to the earnings growth rate, with 1 considered fair value. With a PEG ratio of just 0.65, STMP is growing earnings faster than its current price reflects, suggesting the stock is undervalued.

Earnings

Stamps.com last announced its earnings results on Wednesday, July 30th. The company reported $0.55 earnings per share (EPS) for the quarter, missing the consensus estimate of $0.58 by $0.03. The company had revenue of $34.30 million for the quarter, compared to the consensus estimate of $33.16 million.

During the same quarter in the previous year, the company posted $0.60 earnings per share. The company’s revenue for the quarter was up 6.9% on a year-over-year basis. Analysts expect that Stamps.com Inc. will post $2.26 EPS for the current fiscal year.

Stamps.com Inc. also updated its FY14 earnings guidance on Wednesday. The company provided EPS guidance of $2.10-2.50 for the period, compared to the Thomson Reuters consensus EPS estimate of $2.33. The company issued revenue guidance of $130-145 million, compared to the consensus revenue estimate of $135.49 million.

Positive Moves

Stamps.com Inc. has some positive things going for it at the moment with the recent acquisition of ShipStation.com for $50m in cash, such as:-

• 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 are the #1 shipping and order management solution for ecommerce stores. Mostly all big ecommerce systems connect directly to ShipStation which is a huge benefit.

• It streamlines and improves the efficiency of shipping packages with other stats to help you see how your business is doing.

• It’s finally a step forward for Stamps.com Inc. (NASDAQ:STMP) to diversify revenue away from USPS, as USPS has been a real risk due to financial struggles.

Analysts Opinions

Analysts at Zacks upgraded shares of Stamps.com from an underperform rating to a neutral rating in a research note on Tuesday, July 1st. They now have a $34.50 price target on the stock.

The company has been the subject of a number of other research reports:-

• Analysts at Craig Hallum downgraded shares of Stamps.com from a “buy” rating to a “hold” rating in a research note on Thursday, May 1st.

• Analysts at Sidoti initiated coverage on shares of Stamps.com in a research note on Wednesday, April 16th. They set a “buy” rating on the stock.

Four equities research analysts have rated the stock with a hold rating and three have assigned a buy rating to the company’s stock. The stock currently has an average rating of Hold and an average target price of $43.15.

Conclusion

Given that the stock has taken a hit, down 22% year to date, it appears that any negatives have already been priced in. The company also has a share repurchase plan of up to 1 million shares, none of which has yet been used, which gives it plenty of room to support the stock price or make more acquisitions.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE OF THE WEEK: Buy the STMP Nov 2014 35.000 call (STMP141122C00035000) at or under $1.60, good for the day. Place a protective stop limit at $0.65 and a pre-determined sell at $3.00.


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