This Office Products Company is Highly Undervalued

Gaurav is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While the market is hardly bullish on the office products superstores, the prevailing wisdom is that the segment will swing to the upside once job growth appears. However, growth does not come easily to any saturated industry and the office products space is no exception. Growth in a mature sector must be earned, even hunted, and the office space sector has not hunted hard enough for growth. It has missed opportunities such as Keurig, Vistaprint, iPad, wireless and the middle market.

As a result, all the major office products companies, including Staples (NASDAQ: SPLS), Office Depot (NYSE: ODP) and OfficeMax (NYSE: OMX), have struggled tremendously in recent years. The following summarizes the stock price movement of these companies over the last two years.

We can see that the stock price of each of these office products giants have dropped significantly. While OfficeMax shares are showing some signs of recovery, Staples is the one that has been hit the most dropping more than 50% over this period. Being the largest office retailer globally, Staples has the greatest exposure to the worsening macro environment, especially in Europe. However, it is interesting to note that Staples is the only one among these three companies that has managed to post profits every year over the last five years. In my opinion, Staples remains the best-in-class retailer with a strong global franchise and virtually unrivaled online operations. Following a gradual decline over the last few years, I think there is a significant opportunity for upside in the stock over the next 12 months.

I see significant sales growth opportunities including growth in services, tech, break room supplies, delivery & further market share gains. Furthermore, I believe the company is well positioned to execute on operating margin expansion initiatives including purchasing synergies, G&A savings, supply chain efficiencies, and growth of service & private label offerings. The company is planning to expand its portfolio of products to draw more consumers and will be focusing on mobile marketing to grow what is already the second biggest retail business on the Web. The company has a strong balance sheet and a plenty of cash to accomplish such goals. Let’s look at the Debt/Equity ratio of Staples as well as OfficeMax and Office Depot.

Company

Staples

OfficeMax

Office Depot

Debt/Equity

0.27

0.96

0.99

Clearly, Staples’ debt level looks manageable and thus, poses less risk in the event of a business decline as compared to OfficeMax and Office Depot.

According to a recently conducted national survey, Staples is among the fastest online shippers. Consumers really care about delivery time, many times even more than price. It is encouraging to see that the company has realized the importance of timely delivery in the e-commerce industry and implemented well on the initiative. Going forward, I believe these advancements will drive better sales as more and more people become aware of this.

The company is dealing with shrinking margins, but a large part of that is due to unreasonable pricing by Amazon. Moreover, it’s not just Staples. OfficeMax and Office Depot have also seen a huge reduction in margins over time. Encouragingly, Staples is still making better profits as compared to Amazon as well as OfficeMax and Office Depot. Staples has a cost advantage due to favorable economies of scale and is likely to enjoy better margins in the future as well.

In short, I believe Staples is a highly underappreciated company and an undervalued stock. The company is decreasing its square footage area, which will improve profitability and ROIC. Moreover, the company has made several changes over the last year including a leadership changes and reorganization of its sales-force and I believe the company is on the right track to see stabilization. The company is coping with the ongoing challenges very well and it will gradually reflect on the share price; until then there is a generous 3.60% yield to enjoy. I rate it a buy.


gauravguru has no positions in the stocks mentioned above. 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!

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