The economic downturn means fewer office supplies are needed.
Long-term prospects for Staples (SPLS), the leading office supply company in the US, are strong, but analysts expect the company to take a hit in the third quarter.
The company is scheduled to report third-quarter 2009 earnings before the market opens Tuesday. Analysts expect Staples to earn $0.38 a share, down from $0.42 for the same period a year ago as businesses and retail customers cut back during the recession.
Standard & Poor’s recently lowered its recommendation on the stock to Sell from Hold, citing valuation and the company’s limited potential for future growth.
"Staples recently traded at over 17 times our fiscal year 2011 earnings per share estimate, a significant premium to the S&P 500,” Standard & Poor’s says in a research report. “Although we anticipate strong results for Staples’ North American Delivery Division, over the longer term we were disappointed in the severity of the recent slowdown … While we favor Staples’ strong balance sheet, significant free cash flow generation and cost synergies from the Corporate Express acquisition that should accrue over the next few years, we think the office supply industry is extremely mature and growth potential rather limited."
S&P pegged its 12-month target price at $21 a share. In mid-day trading Monday, the stock rose 0.09% to $23.34 a share.
But S&P notes risks to its target price for Staples include a strong economic recovery, stronger-than-expected corporate spending and hiring as well as “favorable” currency movements.
Staples serves businesses and retail customers through about 2,218 stores (including about 1,523 in the US) in 27 countries throughout North America, South America, Europe, and Asia. The company is also active in Australia. In July 2008, Staples solidified its position as the top supplier to businesses and institutions with the $2.65 billion acquisition of Corporate Express. In 2008, the company’s worldwide sales totaled $23 billion.
Office supplies are commodity products, making marketing, service, and store presentation key elements in success. Direct competitors include Office Depot (ODP) and OfficeMax (OMX). Mass merchandisers, including Walmart (WMT), Target (TGT), Costco (COST), and online retailer Amazon.com (AMZN) have boosted their office supply offerings and could increase their share of the $332 billion worldwide market.
S&P expects the office supply industry to grow at an annual rate of about 3% for the next five years with the higher-margin commercial sector -- about 36% of the industry -- continuing to outpace retail sales.
The acquisition of Corporate Express expanded Staples’ contract sales in the US and established the company in the sector in Canada and Europe.
“We expect cost synergies of about $300 million annually as a result of this transaction, and believe that this transaction greatly enhances Staples’ position in the faster growing contract segment,” S&P says.
Morningstar offers a similar view of Staples.
“Although industry headwinds are unlikely to abate over the near term, we expect Staples to widen the gap between its competitors and extend its leadership position as economic conditions stabilize due to expanded delivery capabilities and broader geographic exposure stemming from the Corporate Express acquisition,” R.J. Hottovy, an analyst for Morningstar, says in a research report.
Staples offers a broad product line, including private label merchandize, a strong brand name, and established relationships with key vendors. The company is expanding its tech support services for businesses and its copy store formats in an effort to broaden its base and improve margins.
“Considering its differentiated approach, Staples should continue to generate excellent returns on invested capital,” Morningstar’s Hottovy says.
On September 15, Staples announced a cash dividend of $0.0825 per share payable on October 15 to shareholders of record on September 25, 2009.
Major institutions holding Staples’ stock include Fidelity Management & Research, Vanguard Group, State Street Global Advisors and Goldman Sachs Asset Management.
For Hoofy and Boo's take on Staples:
No positions in stocks mentioned.
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