New Threads Only:  Add to Google Reader or Homepage
New Threads & Replies:  Add to Google Reader or Homepage
Forums are for serious investors only. GuruFocus Forum Rules.

Forum List » Guru News and Commentaries
Guru News, Stock picks and commentaries
New Topic Search
Goto Thread: PreviousNext
Goto: Forum ListMessage ListNew TopicSearchLog In
Goto Page:  123Next
Current Page:1 of 3
How The Times Change...
Posted by: The Science of Hitting (IP Logged)
Date: August 24, 2012 09:16AM

Here’s a quick exercise that I find quite interesting:

Assume that you are looking at a company in 2005 with the following characteristics: it reported revenue of just over $39.5 billion, and net income of $1.07 billion (net margin of 2.7%); now fast forward to 2011, and look at that same company in the heart of a global economic slowdown – sales for the fiscal year came in at $43.6 billion (1.66% CAGR) and net income was up slightly to $1.12 billion (net margin of 2.6%).

You know that this company has been hurt by unemployment (and that key markets are materially worse off in this metric compared to the starting period), but expect that an eventual recovery in certain markets around the globe will act as a tailwind for the business. As far as headwinds go, the company is facing some structural changes and intensified competition, though not from anyone beyond competitors that were ferociously fighting for share in 2005 as well.

With this information, what would you be willing to say about the relative value of this corporation - more attractive in 2005, more attractive in 2011, or just about the same in both periods?

In reality, this isn’t a single company - it’s the collective results of the three main U.S. office supply chains: Staples (SPLS), Office Max (OMX), and Office Depot (ODP). Looking at the results for both years, I would assume the consensus is that while the slight contraction in net margin is concerning, the ability to continue driving sales growth (albeit slowly) in the heart of the worst economic crisis since the Great Depression is a plus; as a result, I would conclude that there’s little to suggest that intrinsic value has moved materially in either direction.

The market, on the other hand, doesn’t seem to agree: in 2005, these companies had a collective market capitalization of $25 billion; Mr. Market was willing to pay 24x earnings for a company facing structural headwinds (the negative impact of computers, email, etc on paper and ink sales was widely anticipated) and intensifying competition from a growing e-commerce industry. Fast forward six years (and into the heart of double digit unemployment around the globe), and it appears that the industry has (collectively) navigated this environment with some success – except now Mr. Market is only willing to pay $8.4 billion, or one-third of the previous amount, for a comparable level of earnings.

This isn’t to conclude that these companies are currently undervalued; all I’m trying to do is point out something that is often overlooked – the threats facing these companies are identical to what they were half a decade ago. Some people believe that this industry is all but dead, that it will not be able to stand up to Wal-Mart (WMT) and Amazon (AMZN) – and they point to a stock price that forecasts disappearing earnings and other troubles ahead as evidence; personally, I think using stock prices as justification for such beliefs rather than the financials (which suggest something quite different) is illogical (particularly if one is active in the markets, and thus by deduction believes inefficiencies do exist).

My point is this: the market was willing to pay a rich premium during the heights on an economic boom (essentially implying that the good times would continue), yet will pay just a third of the previous price for the same dollar amount of earnings in the depths of a recession (essentially implying that the bad times will not only continue, but intensify); for the individual that can keep a level head while others are dancing between bouts of euphoria and despair, I think the fundamentals point to a sweet spot somewhere in the middle.



Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 3.9/5 (25 votes)



How The Times Change
Posted by: marcolanaro (IP Logged)
Date: August 24, 2012 12:16PM

Very interesting and original way of making your point. Completely agree with you. I have been adding SPLS on current weakness.


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 0.0/5 (0 votes)



How The Times Change
Posted by: The Science of Hitting (IP Logged)
Date: August 24, 2012 05:02PM

Marcolanaro,

Same here; thanks for the kind words!


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 0.0/5 (0 votes)



How The Times Change
Posted by: Adib Motiwala (IP Logged)
Date: August 24, 2012 07:57PM

The true worth possibly lies some where in between. Clearly the 2006 valuation was too high on an absolute basis. The current valuation looks low on the trailing basis. However, the companies are in a mature and out of favor industry and facing competition. That has compressed multiples drastically. If the leader is able to out last the other weaker players and take some tough choices, the true value may be assigned. (Hint :Any chance of shutting down Europe operations? or does that not make sense?) Shrink the capital. Use it to pay off debt ?



Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 1.0/5 (1 vote)



How The Times Change
Posted by: Patience Investing, Inc. (IP Logged)
Date: August 24, 2012 10:47PM

I am also adding SPLS every time it went down. At the current price, i got 18% and 42% margin of safety from my P/E and FCF valuation. Moreover, i got Piotroski F-score of 9.00 (means strong company; low probability of bankruptcy) and Altman Z-score of 3.93 (means safe; bankruptcy unlikely). Thanks for your writeup.


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 0.0/5 (0 votes)



How The Times Change
Posted by: Graham101 (IP Logged)
Date: August 25, 2012 07:58AM

the financials only report the past - so, earnings may not be as reliable if the competitive landscape gets worse; but this is stating the obvious - i think the article would've been more informative if the competitive position was analysed more thoroughly and translated to a range of earnings estimates over next five years or so.


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 0.0/5 (0 votes)



How The Times Change
Posted by: The Science of Hitting (IP Logged)
Date: August 25, 2012 09:20AM

Adib,

That's a good question; in the case of SPLS, we will hear management's thoughts on those items on the Q3 call...

Patience,

Agreed; I don't know how low this can go, but if the fundamentals are unchanged I'll be there the whole way down.

Graham,

That's partly the point: this idea that the fundamentals have changed so drastically in the course of five years is materially overstated in my opinion - particularly when one considers the industry and the affect the economy (particularly unemployment in sectors like financials and government, which have been hit the hardest) has had on it. Any analysis of the competitive environment (beyond SPLS vs OMX vs ODP) is difficult because Amazon, Wal-Mart, etc tell us little/nothing about their sales by category. With that being said, I've come across some interesting ecommerce sales data - which I will present in an article relatively soon.

Thanks for all your comments!


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 2.0/5 (1 vote)



How The Times Change
Posted by: waup7707 (IP Logged)
Date: August 25, 2012 01:07PM

Is it possible office supply stores are in the early stage of secular decline because competitive dynamics have changed and business economics are deteriorating? Five to ten years from now, how big is the threat of amzn and wmt to spls/omx/odp? Several years from now, is it likely that office supply stores will be in dire strait like tech/electronics stores such as circuit city, rsh, bby, gme are in now? Unless I can understand future competitive advantages of office supply stores, I wouldn't bet my money on their future profit margin or survivability.


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 1.0/5 (1 vote)



How The Times Change
Posted by: coda (IP Logged)
Date: August 26, 2012 04:39AM

Hi Science of Hitting, sorry but I think there is a major flaw in your point. You saying that these companies are as much valuable today as they were some years ago...let's say you're right you still didn't prove that these companies are cheap today. Couldn't it be that they were overpriced by the market back then and that now they're just fairly valued?or maybe still expensive?! What I mean is that until you delve into fundamental analysis you won't find an answer, there's no such a shortcut.


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 0.0/5 (0 votes)



How The Times Change
Posted by: Dr. Paul Price (IP Logged)
Date: August 26, 2012 07:10AM

Coda,

Take away the emotion/bias and look at the facts (per share)

SPLS ............. 2005 ........ 2011 ....... % Change
Sales ............. $22.01 ..... $35.96 ....... + 63.4%
Cash Flow ...... $1.56 ....... $2.06 ......... +32.1%
EPS ............... $1.12 ....... $1.37 ........ + 25.0%
Book Value ......$6.06....... $10.08 ........+ 66.3%
Dividend ...........$0.17 .......$0.40 ......... +135.3%

Did SPSL add value since 2005? The answer is obvious.

Since YE 2011 the dividend has been raise to a $0.44 annual rate. YE 2012 book value is now expected to be greater than $11.


Stocks Discussed: SPLS, OMX, ODP, WMT, AMZN,
Rate this post:

Rating: 5.0/5 (1 vote)



Goto Page:  123Next
Current Page:1 of 3


Sorry, only registered users may post in this forum.

Please Login if you have an account or Create a Free Account if you don't
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide