Postal metering market leader Pitney Bowes’ (PBI) stock fell off a cliff last year after missing earnings. However, things do not appear to be getting worse. On the latest conference call, management said the financial services sector is still weak but not “significantly different than what our plan was.” The U.S. postal rate increase is nearing its anniversary and should have minimal impact after that, and the company is “nearing the conclusion of our evaluation of the strategic options for U.S. Management Services and we expect to make a statement by the end of the second quarter.”

Over the last 12 months, Pitney Bowes has generated $834 million in free cash flow (cash from operating activities less capital expenditures.) That represents a very solid 11.2% free cash flow yield on the $7.44 billion market capitalization, a 7.8% premium to the current yield on five-year Treasuries.

With a risk premium that high, I am not especially concerned about growth and could even accept modest declines in cash flow. However, declines are not expected. The lowest estimate on Wall Street calls for 6.1% annual growth over the next three to five years, and the consensus estimate is 12%.

Assuming earnings estimates are on target, simple reversion to the five-year average P/E could justify a $51 price (42% above current levels) within 12-18 months. Longer term, the shares could justify a $67 price within five years based on the lowest growth estimate and an 8% terminal free cash flow yield.

Disclosure: At the time of publication, William Trent has no financial position in the companies mentioned in this article.