A First Look at Staples (SPLS)

Bonds outstanding: $2.5 billion

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What the company does – Staples is the world’s leading office products company, with $25 billion in sales and more than 2,000 stores in 25 countries. The company represents an estimated 10% of the global office products market, larger than direct competitors OfficeMax and Office Depot combined. North American delivery is the largest segment (40% of revenue), followed by North American retail (39%), and international operations (21%).

Morningstar’s take – Staples need not fear losing its number-one status among the office products distributors. In fact, we assert that the firm can extend its already market-leading position. While office supplies are an intensely competitive industry, we continue to believe that the firm’s scale, distribution efficiencies, and ability to broaden the scope of its business through service offerings will provide ample revenue growth and margin expansion opportunities. In our view, Staples may have an emerging economic moat given improved distribution efficiencies and bargaining power over suppliers.

DIVIDEND RECORD – Staples converted to a quarterly dividend payer in 2009.  It has grown its dividend nicely since then.

Dividend: $0.10 quarterly

Dividend yield: 2.73%  ($0.40 annual / $14.64 share price)

Dividend payout ratio: 32% ($0.40 / $1.26 average adjusted EPS)  I’d like to see Staples pay out 80% of its average adjusted earnings ($1.26 EPS x 80% = $1.00).  A $0.25 quarterly dividend would make Staples a 6.8% high dividend stock at the current share price.

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EARNING POWER – Staples has a very consistent earning power through the economic peak in 2007 to the depth of the bust in 2009.

(Earnings adjusted for changes in capitalization to 699.42 M shares)

EPS

Net income

Shares

Adjusted EPS

JAN 2007

$1.32

$974 M

740 M

$1.39

JAN 2008

$1.38

$996 M

720 M

$1.42

JAN 2009

$1.13

$805 M

712 M

$1.15

JAN 2010

$1.02

$739 M

722 M

$1.06

JAN 2011

$1.21

$882 M

726 M

$1.26

Five year average adjusted earnings per share is $1.26

Consider contrarian buying below $10.08 (8 times average adjusted EPS)

Staples is currently trading at 11.6 times average adjusted EPS.  This is value pricing.

Consider value buying below $15.12 (12 times average adjusted EPS)

Consider speculative selling above $25.20 (20 times average adjusted EPS)

BALANCE SHEET – Staples has a decent balance sheet.

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Book value per share: $10.08 TTM

Price to book value ratio: 1.45 (under 1.0 is good)

Current ratio: 1.51 latest quarter (over 2.0 is good)

Quick ratio: 0.76 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.22 (lower is better)

CONCLUSION – Staples is a moderate dividend grower that appears to be well positioned in their industry.  It is value priced with a decent balance sheet.  I think that this will be an excellent stock at the bottom on the double dip recession that is coming.  Put it on your watch list between $15 and $10 dollars per share.

DISCLOSURE – I don’t own Staples (SPLS).

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Published in: on January 6, 2012 at 2:18 pm  Leave a Comment  

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