GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Consumer Staples at a Bargain Price

May 20, 2011 | About:
Every now and then you get a chance to buy a premier company for an unbelievable price. Staples (SPLS) — America’s largest office supplies company now falls into that category. Their Q1 earnings report was ahead of last year’s but below estimates, and the stock tanked to a level not seen since the depths of 2008’s end of the world market environment.

Staples had touched as high as $23.75 this year yet cratered to $16.48 as I’m writing this on May 20. What horrible news did they announce to set this plunge in motion? Management stated that full-year 2011 earnings are likely to come in at about $1.40 per share versus analyst estimates of $1.55.

That 9.7% reduction in expectations now sees Staples shares 30.6% below their January high. Even more absurd is the fact that the newly lowered target of $1.40/share would still eclipse their all-time high for EPS set in the pre-recession year 2007. 2007’s peak price was $27.70 and represented a P/E of 20.

Today’s multiple is just 11.8x the already trimmed estimate. That’s the second lowest P/E ever recorded for this fine company. The only time is registered lower was for those lucky enough to have caught the exact, to-the-penny low in November 2008. Buyers at that time saw their shares surge from $13.60 to $25.10 before the end of 2009.

427304404.jpg



Two earlier great buying opportunities for Staples arose late in 2000 and 2002. In the first case value hunters saw Staples go from $6.80 to $15 in the next 18 months. Contrarian investors in 2002 did even better with a rise from $7.80 to $22.60 in about 2 years. The starting multiples in both those cases were well above today’s P/E.

Staples initiated dividend payments in 2004 and has raised them six times since then. The 10-cent quarterly payout is well covered at about 28.5% of this year’s earnings while providing an attractive 2.43% current yield. Just a glance at the Value Line data will show you that this is well above any previous yield available to Staples holders.

Here’s a nice chart to illustrate the sustained growth that Staples has posted over the past decade:



Per Share* (adj. for 3/2 split in 2005)


2000


2010


Percent Increase


Revenues


$15.66


$34.05


117.43%


Cash Flow


$0.73


$1.91


161.64%


Earnings


$0.39


$1.21


210.26%


Dividends**


Nil


$0.36


NMF


Book Value


$2.59


$9.65


272.59%


* Data Source: Value Line


** Dividend raised to $0.40 in 2011


Is Staples a high-quality issue? Here is Value Line’s take on a few key metrics:

1297316695.jpg



It doesn’t get much better than that.

What is Staples truly worth?

Staples 10-year median multiple has been 20x. The trailing 5-year average P/E was 18.04x including the worst market environment most of us has ever lived through. Value Line uses a very conservative 17 multiple in computing their 2014-2016 projected stock price range of $30 - $50 while assuming EPS can reach $2.20 by 2016.

A rebound to even 16x the new estimate for 2011 would bring STAPLES back up to $22.40 – a gain of 35.9% from this morning’s quote. Is that a crazy target? Glance back at the Value Line chart to see that STAPLES has actually traded above that price during each calendar year since 2004 including 2011 YTD.

How cheap is STAPLES right now? $16.48 is lower than the absolute lowest trades hit in 5 of the past 7 years. You’re getting about the lowest P/E, lowest P/BV, lowest P/CF and highest yield in the history of this company.

I see very low risk and very nice upside in a market-leading, high quality name.

Dr. Paul Price

www.OptionsProfits.com


www.BeatingBuffett.com

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.6/5 (20 votes)

Comments

superguru
Superguru - 3 years ago
Has competitor landscape changed for Staples? Any threat from online world of Amazon or retailers like Costco and Walmart? Is Staples growth and Margins under attack?

As we saw with Washington Mutual and Countrywide and many others, cheap based mainly on historical prices and valuations are often value traps.
Dr. Paul Price
Dr. Paul Price premium member - 3 years ago


All the competitors you named above have been around for the entire last decade.

SPLS's Net profit margin in 2010 was 3.6%

SPLS's Net profit margin in 2001 was 2.9%

superguru
Superguru - 3 years ago
I just gave those companies amzn, cost and wmt as an example. I have not studied SPLS or its market and I do not know what is going on so asked the question.

WMT has been around for few decades but for most of that time it did not compete in electronics, DVDs and groceries but when and where it did, it changed the landscape.

So your argument/opinion is that market is being irrational in pricing SPLS and there is no fundamental cause or shift behind it. It is hard to accept that without any facts supporting it.
Dr. Paul Price
Dr. Paul Price premium member - 3 years ago


The 10-year numbers don't lie.

They're way up in every measurable category despite all competition that has been thrown at it.
cjmitchell86
Cjmitchell86 - 3 years ago
What is the catalyst to unlock the value? Recently, it seems a growing number of companies have been getting hammered after releasing poor guidance despite attractive relative valuation metrics (PWER is the first to come to mind, also HPQ and MRVL). Do you see any catalysts that would expand SPLS's multiple back to historical levels?

Also, something to consider is how SPLS has been able to pass through inflation in the past? I am curious to see if the sell off is related to poor ability to pass through higher costs to customers. This presents a high uncertainty in retail right now

rgosalia
Rgosalia - 3 years ago
This situation is very interesting given that Staples' competitors are operating at near zero margins:

Data for TTM:

Staples

GM 26.86%

OP 6.32%

OfficeMax

GM 25.6%

OP 1.77%

OfficeDepot

GM 28.80%

OP -0.64%

Looks like Staples obviously has some advantage over its brick-mortar competitors to sustain margins (I guess some distribution advantage).

So, question is how long can competitors continue to operate at near zero margins causing irrationality in this market? And then in the longer-term can Staples co-exist with Amazon?

Amazon has some advantages one can say over Staples - It can probably distribute at lower cost than Staples (better contracting with UPS), no sales tax, lowest cost provider.

I am not sure I know the answer to any of the above, but in my opinion, one needs to answer these questions in addition to looking at past data

Any thoughts?

Adib Motiwala
Adib Motiwala - 3 years ago
Thanks for the idea.

Statistically speaking SPLS looks cheap at 11x P/FCF and 8x EV/EBIT.

"A rebound to even 16x the new estimate for 2011 would bring STAPLES back up to $22.40 – a gain of 35.9% from this morning’s quote".

You are relying on TWO elements for that stock price increase

(1) SPLS realizing that EPS guidance by management. EPS going from 1.21 to 1.4 and

(2) P/E multiple increasing from 13x to 16x.

I would say that analysts are expecting lower than $1.4 EPS and thats why the hair cut in the stock price. If the next two quarters come out as planned, then it could re-rate upwards. Else, there could be more pain ahead.

What is your assessment of margins, sales growth and competition from other channels?

thanks

Adib
Adib Motiwala
Adib Motiwala - 3 years ago
Good questions Rishi
rgosalia
Rgosalia - 3 years ago
Adib,

Looking at the star ratings, apparently, readers of this thread don't think its a good question. I almost think that people who give one or two stars should be forced to comment on the reason why they disagree (and same for those who give 5 stars on why they agree).

Adib Motiwala
Adib Motiwala - 3 years ago
Rishi,

Why are you worried about the star ratings of a post or comment? You are doing such a good job sharing your ideas and questions. Its a free forum. Let people give whatever ratings. There is a reason you won the competition last month :)
darkman5051
Darkman5051 - 3 years ago
really, I picked up 3000 shares and I am going to sit on it, is a very good company
tonyg34
Tonyg34 - 3 years ago
"Looks like the economy's still stuck in neutral,"

if you read (listen to) the conference call management specifically states that the inability to pass on costs to consumers was the cause of the downward revision for FY 2011 earnings. sales were flat on a local currency basis, margins contracting, businesses moving to electronic records keeping (including "double digit" drop in sales to the gov't) and the never ending commodification of all things retail (competition from big box retailers and online shopping).

there are positives for the company: online retail site, #2 behind AMZN, and a reputation as the low cost provider in the office supply space (bargaining power with vendors).

Sales will continue to be flat, margins will continue to shrink (gaining market share at the expense of profitability) and competition will continue unabated as SPLS can't offer the meaningful customer service advantages that help home improvement/appliances/high tech retailers differentiate the customer experience. there are already too many stores (if you add up SPLS, OMX, and ODP, plus WMT, COST) so there's no where to profitably reinvest in the business. Retail is a really tough business, especially when you can't differentiate your product or your customer service.

Please leave your comment:


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