Stick with Staples

11/05/2004 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

"Staples means business," says Chuck Carlson, editor of The DRIP Investor. "If you are looking for a direct play on continuing improvement in the economy, a better jobs market, a technology recovery, and global expansion, Staples fits the bill on all fronts."

"Staples (SPLS NASDAQ)  claims to have invented the office-superstore concept in 1986. Today, the firm operates approximately 1,600 office superstores in the US, Canada, and Europe. The company, the world’s largest office-supply retailer, sells a wide range of office products, including supplies, furniture, technology, and business services. The company also has catalog and e-commerce businesses. Staples has put up good numbers for the last several years. Indeed, per-share profits have advanced in nine of the last 10 years, including the last three years. Growth has been impressive so far in 2004. Per-share profits jumped 36% in the first half of fiscal 2005 ending in January. While growth will slow in the second half of the year, the firm should still turn in double-digit earnings gains.

"Fueling Staples’ growth is store expansion and gains in its contract-business operation. Overseas expansion has been especially pronounced. European sales were up 17% in the first half of the fiscal year. International expansion will get a lift with the penetration of the $25 billion Chinese office-products market via a joint venture with a Chinese Internet and catalog-delivery business. The company’s contract business, which serves larger corporate entities, saw revenue jump nearly 11% in the first half of the year. This business will get a lift with the recent five-year, $275-million deal with Bank of America. For fiscal 2005, Wall Street is expecting earnings of $1.39 per share. That number jumps to $1.61 in fiscal 2006. Based on the fiscal 2005 estimate, the stock sports a price/earnings ratio of 20. While that multiple is not necessarily bargain basement, it is a reasonable valuation for a company posting hefty double-digit earnings gains.

"Staples initiated an annual dividend earlier this year, and it is the company’s intent to pay an annual dividend going forward. The stock has performed relatively well in 2004, rising 5%. However, while a near-term breather is possible, I expect 2005 to be another solid year. The stock is a buy at current prices, and investors can become more aggressive buyers on pullbacks. The stock has been hovering around its 52-week high of $30.64 per share. A strong move through that level would be especially bullish. Staples has crossed the $30 level in the past — the stock’s 1999 high was nearly $36 — so a strong move to the mid-$30s would not be surprising. Please note that the company’s DRIP permits initial purchases directly. Minimum initial investment is $250, but the firm will waive the minimum if an investor agrees to automatic monthly investment of at least $25."

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