Growth of ecommerce pushes funds into small-fry shipping firms

By David Randall

NEW YORK (Reuters) - Forget Amazon and its out-of-this-world share price.

Instead, U.S. mutual fund managers are turning to small-scale shipping companies such as Stamps.com Inc and Pitney Bowes Inc as a backdoor way into the growing $334 billion e-commerce market.

Funds from firms including T. Rowe Price, Lord Abbett and Royce Capital were among the 28 that added Stamps.com to their portfolio in their most recent quarter, a 250 percent jump from the quarter before, according to Morningstar. Competitor Pitney Bowes, founded in 1920, saw the number of funds adding shares of the company to their portfolios jump by 30 percent over the same time.

Portfolio managers say that they are attracted to e-commerce suppliers not only because of the growth of Amazon and smaller scale businesses like the eBay and Etsy stores of the world, but because of the decline of the U.S. Postal Service.

Package volume rose 14.4 percent in the Postal Service's second quarter, while standard mail dropped 2.1 percent. After a round of acquisitions by both companies over the last 12 months, Stamps.com and Pitney Bowes are the largest firms licensed by the Postal Service to create and print official postage at home, making themselves the most likely alternative should the Postal Service follow through on its plan to cut some rural locations. Both firms sell stamps at marked-up rates, and also provide customers ways to ship via FedEx, United Parcel Service and other firms.

With the likely pullback in Postal Service branches and the company's 2014 acquisition of web-based shipping software company ShipStation, "I think Stamps.com is better positioned than they've ever been," said Jim Harvey, a portfolio manager at Royce Funds who has owned shares of the company on and off since its initial public offering in 1999 and added the company back to his portfolio earlier this year.

Stamps.com is not without risks, of course, the chief being its reliance on Amazon. While the company does not disclose the amount of revenue that comes from Amazon-related business, analysts say that it is a significant portion of its sales.

Its record results in the first quarter helped spark a 46 percent rally in the share price for the year to date, leaving it trading at 41 times earnings, approximately double the multiple of the Standard & Poor's 500 index.

Amazon, by comparison, is up 71 percent over the same time, and doesn't have a positive price to earnings multiple over the last 12 months because it hasn't been profitable during that period. Amazon closed at $537.01 Wednesday, and is up 73 percent for the year to date.

BROAD PUSH INTO E-COMMERCE

It's not only Amazon driving the expansion of e-commerce. Hoboken, New Jersey-based startup Jet.com, launched in July by the former founder of Diapers.com, aims to take on Amazon by undercutting the company by shipping from local merchants. Macy's Inc, meanwhile, is expanding its same-day delivery service currently available in cities including San Francisco and Chicago to other major markets.

Market research firm Forrester Research estimates that e-commerce, currently making up 10 percent of all sales in the U.S., will expand by some 43 percent to $480 billion within five years, and funds are picking up other companies connected to business, even as some share prices decline.

Sonoco Products Co and International Paper Co, two of the largest cardboard box makers in the US, each saw the number of funds adding the companies to their portfolios for the first time jump by 20 percent or more last quarter, according to Morningstar.

Shares of Sonoco Products, which trade at a below-market price to earnings ratio of 15.4, are down 5.4 percent for the year to date. Shares of International Paper, which at a P/E of 21 trade slightly above the market average, are down 10.6 percent, in part because of the global sell-off in commodity-related companies.

Shares of Pitney Bowes have fallen 16 percent over the same time, largely on account of the fact that revenue in its growing e-commerce business did not make up for a decline in its postage metering segment typically used by businesses to send out monthly bills to customers.

The declines in Pitney Bowes, and its inexpensive P/E multiple of 10.4, prompted Bryant VanCronkhite, portfolio manager of the $2 billion Wells Fargo Advantage Special Mid Cap Value fund, to add shares of the company earlier this year.

"The market is very focused on the one issue of their secular declining mail business, and ignoring the fact that they are investing" to expand beyond their traditional postage metering business, he said.

In May, Pitney Bowes acquired Borderfree Inc, which helps retailers with international shopping services like receiving payments in several currencies and customs clearing, for $395 million, a premium of more than double the value of the company.

The price was worth it, VanCronkhite said, because it gives the company a way to "service everything from an Etsy store to a global retail business."

"This company is in the middle of a three year turnaround plan, and it's moving more of its operations to the digital side of the business, which is where the economy is going, too," he added.

(Reporting by David Randall; editing by Linda Stern and John Pickering)