Every now and then you get a chance to buy a premier company for an unbelievable price. Staples (NASDAQ: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.
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)
* 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:
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
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