(Friday, February 27, 2009) In an amazing turn of events, Office Depot (ODP) has seen its stock drop by an incredible 97% in the last two years. At its current stock price barely above $1, investors are clearly treating this company as the next Circuity City. So is it?

Some of ODP's credit insurers seem to think so! On last week's conference call, ODP's CFO admitted to some hesitations on the part of some of ODP's vendors due to their credit insurers pulling the plug on insuring ODP's credit:

"The credit insurance issue is one that really came on the heels of the Circuit City announcement. A lot of the credit insurers are people like [Cosmiths], [Eurhermays], Atradius. They have reduced their exposure to retail in general and that has had some impact on us in Europe."

The company has a debt to capital ratio above 70% (after including the effect of operating leases) while its income has been unable to cover interest charges for the last three quarters. Clearly, this does not represent a safe, value investment.

But for those who like to take risks, this stock appears to have far too much pessimism built into it. The company's cash on hand represents half of its market cap! Its current ratio is almost 1.2, and most of its $600 million of long term debt does not come due until 2013. While the company will likely not show positive net income this year, management says it will achieve positive cash flow in 2009. (One source: it will spend only $150 million on capex, the bare maintenance minimum, versus $250 million in depreciation.) ODP also has the luxury of selling land until it can get its cost structure in line with its revenues.

Clearly, Staples (SPLS) is dominating ODP in all profitability metrics. But does that mean ODP is worth nothing? It's certainly possible, but at $1/share, ODP's stock says its likely, suggesting risk tolerant investors have a lot of upside possibilities without having to bet a whole lot.

Disclosure: Author has a long position in ODP

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