FBR has launched coverage on the three office supply superstores: Staples (SPLS), OfficeMax (OMX) and Office Depot (ODP). Analyst Stephen Click explains why he hates SPLS, loves OMX, and ODP is simply “herding cats.”
Staples (SPLS) initiated at UNDERPERFORM, target $22:
We have a glass-half-empty opinion about the recently closed Corporate Express (CXP) acquisition, for which we think Staples overpaid at 10.3x LTM EBITDA. We also believe that Staples pursued CXP aggressively (unsolicited and hostile, at first), as it foresaw the slowdown in its core business and needed a supplement.
OfficeMax (OMX) initiated at OUTPERFORM, target $18:
OMX should be considered a high-risk investment choice, as the company is currently operating without a CFO, its business has been operationally de-leveraging on negative sales trends, and there is no short-term positive catalyst to point to for the stock. Simply put, though, we derive a higher stock price on a sum-of-the-parts basis, and we would expect OfficeMax to monetise assets, or even entertain something strategic, if trends fail to improve during the next year. Therefore, patient investors, with a high tolerance for risk, should be paid if sector trends improve or if the company is forced to think more strategically about its business.
Office Depot (ODP) initiated at MARKET PERFORM, target $8:
The outlook for Office Depot’s stock price is clouded by the lack of any identifiable catalyst. In addition, investor sentiment has been adversely affected by problems with the quality of past earnings, poor execution of business strategy by current management, and the generally unpromising sales environment for the sector.
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