The post-pandemic return to office phenomenon may create some interesting investment opportunities. Many major companies, from Tesla (TSLA, Financial) to JPMorgan Chase (JPM, Financial) have indicated they expect the majority of their employees to return to an office environment to increase productivity. One company that may benefit actually has the word “office” in two of its key brands, Office Depot and OfficeMax.
The ODP Corp. (ODP, Financial) provides business services and supplies, products and digital workplace technology solutions for small, medium and enterprise businesses. The company sells office supply products and services, cleaning and breakroom supplies, technology services, copy and print services as well as office furniture products. As of Dec. 31, the company operated 1,038 physical retail stores. ODP was incorporated in 1986, has revenues of over $8.4 billion and currently has a $1.5 billion market capitalization.
Current structure
After a recent strategic review, the company decided not to engage in divestures or separations, largely due to current market conditions. The new business realignment will have four clearly defined segments, one in the business-to-consumer markets and three in the business-to-business market.
- Office Depot – a provider of retail consumer and small business products and services distributed via approximately 1,038 Office Depot and OfficeMax retail locations as well as an e-commerce presence.
- ODP Business Solutions – ODP’s leading business-to-business solutions provider serving small, medium and enterprise level companies. This includes the contract sales channel of ODP’s prior Office Depot Business Solutions Division, Grand & Toy, which operates one of the biggest distribution networks, serving customers in Canada through it its direct sales force and e-commerce platform and the company’s Federation Entities, which comprise more than a dozen regional office supply distribution businesses acquired by ODP as part of its transformation to expand its reach and distribution network into geographic areas that were previously underserved.
- Veyer Logistics – a leading supply chain, distribution, procurement and global sourcing operation. Veyer procures and distributes products for both Office Depot and ODP Business Solutions, as well as third-party customers.
- Varis – ODP’s business-to-business digital platform technology business focused on transforming digital commerce between buying organizations and suppliers.
Sale of CompuCom
In 2017, ODP acquired CompuCom, a technology managed services provider, for approximately $1 billion. After declining profits and management shake-ups, ODP sold the company for $305 million in January. This created a capital loss of $205 million, according to the company’s latest quarterly filing, that can be used to offset future taxable gains.
Financial review
The company reported decent 2021 results despite the headwinds from supply chain constraints and inflation. Reported sales declined 5.0% from the prior year, largely driven by lower sales in the retail division due to store closures and lower sales of cleaning and protective gear when compared to the prior pandemic-driven year. Despite the decline in sales, adjusted operating income increased 5.2% to $305 million and adjusted Ebitda increased 3.6% to $465 million.
In the first quarter of 2022, sales were flat compared to the prior-year period, but the company could not overcome the near unprecedented effects of inflation, supply chain constraints and higher fuel prices. Adjusted operating income decreased 5.4% to $88 million and adjusted Ebitda decreased 6% to $125 million.
As of March 26, the company has cash and equivalents of $557 million and $199 million in total debt. ODP had $874 million in additional liquidity available under its revolving line of credit.
Valuation
Analyst earnings per share estimates for ODP are approximately $4.25 for 2022 and $4.20 for 2023. The subsequent low price-earnings ratios of around 7 are usually reserved for companies with high debt loads, but ODP has no net debt. The company’s enterprise value/Ebitda ratio is also low at 4.5 times this year's estimated Ebitda.
The company eliminated its dividend during the Covid-19 pandemic in order to preserve cash and has not yet reinstated a dividend payment. At a 50% payout ratio on 2022 estimated earnings per share, ODP could pay a dividend that would yield over 6%. Instead, the company has chosen to utilize the majority of free cash flow for share repurchases.
Guru trades
Gurus who have purchased ODP stock recently include Joel Greenblatt (Trades, Portfolio) and David Einhorn (Trades, Portfolio). Gurus who have reduced their positions include Chuck Royce (Trades, Portfolio) and Hotchkis & Wiley.
Conclusion
ODP appears to be substantially undervalued at this time. The company has the liquidity position to hold out until the inflationary environment subsides and supply chain issues are resolved. Although the company is focused on share repurchases currently, it is possible the dividend may be reinstated in a near-term time frame.
