Did Stamps.com Get a Good Deal on MetaPack?

Rich Smith, The Motley Fool

Updated Wed, Sep 26, 2018, 7:20 PM

Print-your-own-postage service Stamps.com (NASDAQ: STMP) reported second-quarter earnings last month, and it was a bit of a mixed bag.

On the one hand, Stamps.com reported sales growth of 20% and earnings growth twice as strong -- EPS rose 41% year over year. (Stamps also raised its guidance for the year.) On the other hand, both its customer count and its customer churn rate were basically flat. Stamps depended largely on rising ARPU, or average revenue per paid customer, for both its sales and earnings growth, as it shifted its strategy away from growing the customer base and toward a focus on "the largest and most sophisticated e-commerce sellers."

I'm not 100% thrilled with that strategy, as I fear it could limit the company's ability to expand its business in the future. That being said, one thing mentioned in Stamps.com's earnings call that I'm wildly enthusiastic about is the company's purchase of MetaPack.

Here's what you need to know.

The words "50% off" blaring out of a megaphone.

Stamps.com just bought a new subsidiary for half its own price-to-sales ratio. Image source: Getty Images.

Why buy MetaPack?

Stamps.com management went into some detail on the MetaPack purchase (which closed on Aug. 15) during its postearnings conference call.

MetaPack is a London-based e-commerce software company with 350 employees working out of seven different countries. The company's software interacts with more than 500 different customers using more than 450 different "parcel carriers" operating in more than 200 countries around the world. MetaPack's software helps customers choose the best shipper to get their packages from one country to another, factoring in such variables as package "size, weight, stock availability, location, and customer preference" -- and tracks their shipments all the way from Point A to Point B.

Stamps explained that it made the MetaPack purchase for several reasons, one being to "accelerate our efforts to expand our business internationally" and another being to vastly expand its customers' access to new shipping options. Currently, Stamps.com's software interacts with only about 40 shipping companies worldwide. With MetaPack, its shipper base expands more than tenfold. This second rationale will become especially important as Stamps.com expands its business in Europe, where shippers "require a much broader carrier footprint in order to provide a competitive service offering."

That's what MetaPack brings to the table. Now how much is Stamps.com anteing up to gain access to it?

Valuing the acquisition

Stamps.com doesn't make the math easy on this one, but with a little digging into the earnings transcript, it's possible to arrive at an answer.

Initially, Stamps.com planned to spend $230 million to acquire MetaPack. A favorable movement in currency exchange rates between acquisition announcement and acquisition closing, however, meant that the 175 million British pounds that Stamps paid in cash for MetaPack was actually worth only $220 million when the purchase was finalized.

Stamps.com expects MetaPack to produce $15 million to $20 million of "revenue contributions" through the end of this year. Stamps noted that it expects about 75% of this revenue contribution to arrive in Q4. So what does that mean going forward?

Assume MetaPack generates sales of $17.5 million (the midpoint of the guidance range) between mid-August and year-end. Seventy-five percent of that sum implies $13.125 million in revenue for Q4. Multiplied by four quarters in a year, this might mean MetaPack is generating $52.5 million in annual sales. On the other hand, one might expect Q4 -- including the holiday shipping season -- to be a bit stronger than ordinary, so let's ballpark annual revenue a bit lower at $50 million. (If correct, this would still be about three-and-a-half times the revenue MetaPack booked five years ago, and 25% growth from last year's $40 million in sales, according to data from S&P Global Market Intelligence).

Divide this $50 million into the $220 million purchase price, and what do we find? Stamps.com just paid 4.4 times sales for MetaPack. Stamps.com stock, meanwhile, sells for nearly eight times annual revenue -- so it would appear that Stamps.com bought MetaPack for nearly 50% off its own P/S ratio.

Granted, MetaPack's most recent reported financials show that it lost money in both 2017 and 2016 -- and wasn't terribly profitable in prior years, either. That fact may explain why Stamps.com was able to purchase the company for such a steep discount to its own P/S ratio. Whether that low price was a bargain will depend largely on whether Stamps.com can leverage its much larger scale of operations and bigger customer base to earn something on the order of its own 35% operating profit margin from MetaPack's revenue going forward.

We'll be watching.

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