Buy Staples for 25% Upside
Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, I wrote an article on the merger of Office Depot (NYSE: ODP) and OfficeMax (NYSE: OMX). I discussed in detail how the merger’s premature announcement led to a massive rise in the respective stocks the day the announcement was put on Office Depot’s website. However, the stocks have been falling since the formal announcement of a merger given that many important details were not given to investors.
However, what I intentionally left out was the discussion on how the number one office-supply retailer, Staples (NASDAQ: SPLS) will be affected by this merger. I must say that discussion on this merger is incomplete without the mention of its impact on the competitors. Normally, it’s a bad news for a company that its competitors are tying up to become a big enterprise. However, this is not the case for Staples.
No reason why shares of Staples spiked up by 13% on the day the merger was announced. Why the market thinks that Staples will be a beneficiary remains unanswered. Let’s have a look at it:
Benefits to Staples
I will suggest my readers to first go through my post which adequately points out how saturated the office-supply retailer market is. Given the saturation that the market is currently experiencing, any merger of two players will definitely provide some space to the competitors. How? The following estimate tells us:
Together, OfficeMax and Office Depot have approximately 2,074 doors with the largest overlap in the SE and the Midwest. It is estimated that if the combined company were to close 500 doors (~24.1% of total doors) with 50% of those sales captured by Staples, it could benefit Staples' sales by $2.17 billion in FY14, or add approximately $0.13 (or 10% upside) to Staples' FY14 EPS.
Overall Thesis on Staples
Apart from the upside that we see in the form of the merger of ODP and OMX, Staples seems to be an attractive story for the investors. The company is expected to report on Mar. 6.
The Street believes that Staples will be in transition mode in 2013. The company is focused on getting its house in order with straightforward objectives of getting back top-line growth in North America (through renewed e-commerce focus and growing adjacent categories), as well as repairing Europe. Staples’ European initiative, unlike North America, will not be about sales rejuvenation but instead will focus on business unit reorganization and cost and SKU rationalization. Cutting through the aforementioned, the potential impact from the Fiscal Cliff resolution, and that Staples is early in transition mode do not point to near-term upside for this stock. However, at 4x cash flow, and what looks like more stability in the sector, it also does not look like there is much downside. Staples screens well for value oriented investors. Another positive for 2013 is the possibility of selling Apple products in its U.S. stores, which sounds like it is in test mode.
Foolish Bottom Line
The Street has a bullish target price of $16. This means an upside of ~21% from current levels. Not only this, the stock also pays a dividend yield of 3.32%. Therefore I recommend investors dive into the stock to benefit and potentially make a return of 25% on their investments,
AnalystX has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!