Are Investors Overlooking Staples?

With shares of Staples (NASDAQ:SPLS) trading at around $10.62, is SPLS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Not many people are bullish on Staples these days. That’s because they’re thinking about the brick and mortar segment of the company. While traditional retail still accounts for the majority of revenue for Staples, the online segment is growing at a rampant pace. Staples isn’t just the largest office supply chain in the world, it’s also one of the largest online retailers in the world. Staples does over $10 billion in online annual revenue. Therefore, if you’re worried about Amazon (NASDAQ:AMZN) knocking Staples out the online competition, you’re being paranoid. Staples has its own niche, and while Amazon is a serious threat to many online retailers, that isn’t the case here. Another important note is that Staples has one of the fastest online delivery speeds for online retailers, which is essential for anyone ordering business-related materials.

Another big positive is that Staples is focused on cutting costs. The goal is to cut costs by $250 million within the next two years. Then there are smaller positives. Customers were recently asked if they would buy more products if there were more products available. They said “yes.” Logically, Staples plans on adding more products. Staples is also making an effort to expand product-related services.

Start 2013 better than ever by saving time and making money with your Limited Time Offer for our highly-acclaimed Stock Picker Newsletter. Click here for our fresh Feature Stock Pick now!

As far as the 3D printing business goes, Staples is expected to be a leader. Consumers will have an opportunity to upload design files and then pick them up at Staples. However, another company is likely to come along and improve convenience or price, which will lead to a long-term battle in this area. This isn’t as important as previously mentioned factors since the upside potential for 3D printing isn’t that high. The 3D printing business is expected to be a $5 billion industry within a few years. If you look at annual revenue for Staples, this isn’t a significant factor. But it does have the potential to help…

One of the biggest issues for Staples has been slow revenue growth. Several potential avenues for improving this problem have already been listed. Whether the company can achieve these goals or not remains to be seen. In all likelihood, the online business will be the saving grace for Staples. If Staples could advertise how strong they are online, it would improve the company’s image and lead to more online sales. If the general public knows that Staples is one of the largest online retailers, that Staples has one of the best delivery speeds, and most importantly, that so many other people are buying from Staples online, then those consumers will follow the herd.

It’s like throwing a party. If you tell a friend that he’s the only one coming to the party so far, then that person’s interest level will not be elevated. However, if you tell that person that you already have 30 people coming, then he is going to get excited and spread the word, which will lead to a domino effect and increased attendance. This is human nature. If someone thinks that many other people are interested in a product, service, or event, then they are more likely to be interested as well. It’s the herd effect. In this case, Staples has an advantage because consumers are already visiting the website. The key now is spreading the word to the general public so the company’s image goes beyond just a boring brick and mortar office supply store.

Now let’s take a look at some important numbers for Staples.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Staples is strong. It’s also stronger than the debt-to-equity ratios for Office Depot (NYSE:ODP) and OfficeMax Incorporated (NYSE:OMX).  

Debt-To-Equity

Cash

Long-Term Debt

SPLS

0.27

$1.02 Billion

$1.66 Billion

ODP

0.99

$619.53 Million

$486.04 Million

OMX

1.28

$506.02 Million

$1.34 Billion

 

T = Technicals on the Stock Chart Are Weak

Staples has had a rough couple of years when it comes to stock performance.

1 Month

Year-To-Date

1 Year

3 Year

SPLS

8.62%

12.24%

-11.76%

-45.01%

ODP

21.20%

28.96%

84.72%

-36.39%

OMX

8.04%

8.81%

129.80%

-27.83%

 

At $10.62, Staples is currently trading below all its averages.

50-Day SMA

11.69

100-Day SMA

11.58

200-Day SMA

12.59

 

E = Earnings Have Been Steady

It’s rare that a company receiving so much negativity also shows steady annual earnings and revenue growth. The growth here certainly isn’t great, but it’s still growth.

2008

2009

2010

2011

2012

Revenue ($)in billions

19.37

23.08

24.28

24.55

25.02

Diluted EPS ($)

1.38

1.13

1.02

1.21

1.40

 

When we look at last quarter on a YoY basis, we see a decrease in revenue and earnings.  

10/2011

1/2012

4/2012

7/2012

10/2012

Revenue ($)in billions

6.48

6.55

6.11

5.50

6.35

Diluted EPS ($)

0.47

0.40

0.27

0.18

-0.89

 

T = Trends Do Not Support the Industry

Office supply companies are faced with some difficult times ahead. There is simply too much competition. However, while trends don’t support the industry, trends do support Staples. If you look out 5 to 10 years, it’s obvious that online sales will play a tremendous role. If Staples is a leader in this area and trends don’t support other office supply companies, then this will lead to a significant increase in market share for Staples.

Conclusion

The near year or two could be rocky for Staples. The company is going through a transitional phase, and the broader economy is hanging by a thread. However, the long-term story for Staples is a good one. This is a company that’s taking all the necessary steps to position itself well for the future. Staples is a near-term WAIT AND SEE, and a long-term OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.