Inside Wall Street: Staples due to snap back?
A steep decline in its stock attracts bargain-hunters scouting for takeover targets.
When top executives of Staples (SPLS) told analysts this month that second-quarter results were dismal and disappointing, no question was raised about the possibility that the world's leading office products company may end up as an acquisition candidate. But now, that scenario isn't being ruled out by some pros.
The reason: The stock has plummeted since the disclosure of the unexpected quarterly numbers and management's decision to lower 2012 sales and earnings guidance. Shares closed at a new low of $10.70 Monday, down from the 52-week high of $16.84 on Mar. 26. In early 2010, the stock traded as high as $25.93 a share.
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"We believe the stock lacks a near-term catalyst as the macro environment, particularly business spending, remains challenging," laments Rifkin.
But the bullish case for Staples is still alive despite the prevalent negative sentiment on Wall Street towards the stock. One catalyst is the possibility that Staples could end up a takeover target for a private equity group, a larger company or a conglomerate that can better handle and manage its assets and prospects for expansion. Among its rivals in the business are Home Depot (HD), Wal-Mart (WMT), OfficeMax (OMX), and Office Depot (ODP).
Staples, the leading office products market with about 2,300 superstores mostly located in the U.S. (where it operates 1,583 stores), Canada, and Europe, generated net sales of $25 billion in fiscal 2012 (ended Jan. 31). Operating earnings were $2.11 billion, or $1.20 a share, up from $1.21 in fiscal 2011.
Staples also operates in other countries, including China (where it has 28 stores), Australia (17), Sweden (17), Portugal (35), Norway (21), and Argentina (2). Apart from its inventory and assets, Staples' attraction as a possible acquisition candidate is the strategic location of its superstores in the major cities of countries where it operates. And despite headwinds resulting from the uneven global economic recovery, such as the slump in PC sales, the basic fundamentals of Staples’ business are intact, according to the bulls.
One of the few bulls on Staples is Ian Gordon of S&P Capital IQ, who rates the stock as a "buy" with a 12-month price target of $18 a share. "We continue to favor Staples’ management, strong balance sheet, significant cash generation, and cost synergies from the Corporate Express acquisition that should accrue over the next couple of years," says Gordon.
Although the office supply industry is "saturated," Gordon believes Staples will continue to capture market share from its peers. The shares are attractively valued, recently trading at only 8.3 times S&P’s fiscal 2014 earnings which, he notes, is a significant discount to the S&P 500. Gordon forecasts earnings of $1.51 a share for fiscal 2013 and $1.67 for fiscal 2014. Another factor in Staples’ favor is its positive dividend policy, which now provides an attractive yield of 3.6%.
Another analyst who is sticking with his buy recommendation on Staples is David Strasser of Janney Capital Markets. He believes one of the catalysts for the company’s business is Apple’s (AAPL) iPhone. While Staples' mobile phone business showed strong growth, its ultimate success, at least over the near term, depends on Staples getting the iPhone in the U.S., "which we believe is a likely event in the future as Apple expands distribution."
So far, Staples doesn't carry Apple’s products in the U.S. Once Staples is able to secure the Apple business, sales are expected to be a possible game changer, as it could also increase its appeal as a potential takeover target.
Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.
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