A Staple of Your Portfolio?

03/05/2009 10:36 am EST

Focus: STOCKS

Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor, says office-supply retailer Staples is a strong performer and cheap at current prices.

I’ve always liked Staples (NYSE: SPLS), the office-supply chain. Staples is the world’s largest office-products company. With $27 billion in sales, Staples serves customers in 27 countries.

The company has traditionally put up good numbers, and the stock price has been rewarding for investors over the years.

More recently, however, the stock has gotten hammered by a variety of issues:

1. The economic slowdown is impacting businesses, especially the company’s small-business customers.

2. The 2008 acquisition of Corporate Express, a Dutch office-supply company [that is] one of the world’s leading suppliers of office products to businesses and institutions, increased the company’s debt levels substantially at a time when Wall Street is especially nervous about corporate debt levels.

The economic environment has been challenging for all retailers, including Staples. In the fiscal third quarter ended November 1, 2008, total sales increased 34% to $7 billion. However, excluding the impact of Corporate Express, revenue declined 3% in the quarter.

Per-share earnings, excluding acquisition and litigation charges, were flat versus the third quarter of 2008 at 42 cents per share. While earnings are likely to be pressured in the near term, there is cause for optimism over the long term.

For starters, a lot of Staples’ competitors are shuttering stores. Thus, the firm should be able to expand its market share as economic conditions improve. Also, the addition of Corporate Express gives the firm a much bigger footprint internationally.

To be sure, the acquisition added significantly to the company’s debt load. At the beginning of November, the firm had long-term debt and other long-term obligations of nearly $2 billion. The good news is that Staples generates lots of cash flow (more than $1.1 billion through the first three quarters of the fiscal year), which should help in reducing its debt load over time.

Staples is a classic case of a strong retailer that is down with the group but likely to bounce back strongly as its markets recover and market-share gains emerge. While there is a risk of buying early in these shares, patient investors looking over the next 12 to 24 months should be rewarded for purchases in the mid- to low teens.

The stock is down 40% from its 52-week high of $26.57. (It closed Wednesday at around $15.50—Editor.) Yes, the environment for retailers is lousy. Yes, it’s tough to see any near-term improvement. And, yes, debt is evil right now. But the stock is already discounting to a large degree those negatives. The stock’s current price level is attractive enough to warrant some nibbling.

Staples offers a direct-purchase [dividend-reinvestment] plan whereby any investor may buy initial shares directly from the company. Also, the company pays a dividend once a year, usually in March/April. (It yields around 2.1%—Editor.)

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