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Stamps.com on a (perforated) tear
The stock's up 45 percent after a hot product launch. What's next?
September 13, 2004: 12:31 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - You don't have to be a philatelist to appreciate the new photo stamps that Stamps.com has been selling for a little more than a month now.

In fact, the stamps are geared not to collectors, but to regular folks who aren't into "Inverted Jennys" and "Penny Magentas." Consumers can now send digital photos of relatives, pets, and important occasions to Stamps.com (STMP: Research, Estimates), which will mail back legal postage featuring the photos.

Creative ideas

"We've had some great things come through," Stamps.com CEO Ken McBride told me on Friday.

One of his favorites was from a woman in Arizona who hadn't changed her hairstyle in 20 years; when she finally did, she commemorated it by taking a photo of her new do and mailing it as a stamp to her friends.

The company has also tried to stop inappropriate stuff. However, in a stunt, thesmokinggun.com got photos of the Unabomber, executed Cold War spies Ethel and Julius Rosenberg, and Monica Lewinsky's stained blue dress onto stamps.

With the startling recent change in Stamps.com's fortunes, the company may want to make a photo stamp out of its stock price chart.

Since Stamps.com announced the new photo stamps last month, the stock has shot up 45 percent. When it announced on Sept. 2 that 40,000 sheets, or 800,000 individual stamps, had been sold in three weeks, the stock volume rocketed to four times what it had been two days before, adding $27.3 million in market cap to a company investors value at $380 million.

Stamps aren't the only thing to consider

These are pretty heady days for a company that had been near the bottom of the dot-com dog pile for years. But there's a lot to like about what Stamps.com is doing right now, and these photo stamps are just a small part.

The company has been flying under the radar on Wall Street since its Icarus-like rise and fall in the late 1990s. Only two analysts cover the stock -- and one of them just started last week.

But Stamps.com has quietly and cleverly changed its product lineup to address customer concerns. For instance, businesses now have the ability to hide the amount they pay for postage, so customers won't get the impression they're being gouged for shipping and handling.

Stamps.com brought in new management and has inched closer to profitability while initiating large stock buyback programs.

"They've fixed a lot that was broken," says Russell Hoss, an analyst with Roth Capital Partners, who initiated coverage with a "buy" rating. "The underlying business is on track to be profitable in Q4."

Hoss didn't include any photo-stamp sales in his models for the company, but estimates that the product line carries 40 percent gross profit margins for Stamps.com. The other product lines have roughly 60 percent gross margins.

Investor reaction

Are investors overreacting to the photo stamps? Ah, yeah. At its current levels, the stock has a forward price/earnings ratio just shy of the triple digits, and though both Stamps.com and Hoss project GAAP profitability for next quarter, the recent run-up seems excessive considering it's based on an uncertain product line.

I don't doubt the popularity of photo stamps -- I may buy some myself. But let's keep that in perspective. Those 40,000 sheets of stamps the company sold? They grossed Stamps.com all of about $679,600. Also, the current run is part of a two-month experiment set to expire on Sept. 30.

A U.S. Postal Service spokesman won't comment on how the trial is running or what happens after Sept. 30. "It's a test," he says. "We'll evaluate all aspects of the test and make our decision when it's done."

When it's done, it's likely that Stamps.com's competitors, most notably Pitney Bowes and Endicia, will consider launching similar services.

"We're assuming that if this is popular, it will attract people into the market," McBride says. He hastens to add that his company owns nine patents for photo stamps.

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But if photo stamps truly take off, I believe Stamps.com will face competition from the likes of Kodak and other photo-related firms, possibly making the product line more expensive to sustain, with increased marketing expenses.

I applaud the product launch, as well as Stamps.com's other recent moves, but after its latest run-up, the stock is a little too hot for my tastes. Investors should keep their eyes on the USPS decision.

They also should pay attention to the company's next earnings report, in late October, to see how the photo stamps have helped the bottom line.


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