Can OfficeMax Still Outperform in a Struggling Industry?

With shares of OfficeMax Incorporated (NYSE:OMX) trading around $9.66, is OMX an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

E = Equity to Debt Ratio is Not Close to Zero

OfficeMax has a debt-to-equity ratio of 0.89, which looks pretty unattractive when compared to its major competitors. Office Depot, Inc. (NYSE:ODP) clocks in with a debt-to-equity ratio of 0.63, while Staples, Inc. (NASDAQ:SPLS) leads the category at just 0.27.

It’s also important to consider total cash on hand and total debt, which for OfficeMax is $506.02 million in cash and $971.39 million in debt. Office Depot has total cash of $619.53 million and total debt of $671.11 million, while Staples has $1.02 billion in cash but total debt of $1.66 billion.

T = Technicals on the Stock Chart

The company’s stock price was recently 6.29% percent above its 20-day simple moving average, or SMA; 18.75% percent above its 50-day SMA; and 63.78% percent its 200-day SMA.

Since the beginning of 2012 the stock price has been in a fairly pronounced upward trend, rising 114.86% percent this year-to-date and rising 105.73% percent year-over-year.

As a benchmark, the S&P 500 has risen 12.26 percent year-to-date, and has risen 12.18 percent year-over-year.

E = Earnings are Tentatively Increasing Quarter over Quarter

OfficeMax has seen its revenue drop for each of the past four years. While the rate of decline has slowed since 2009 when revenues fell 12.76 percent, the record is still unattractive. Economic headwinds clearly knocked the company on its backside in 2008. That $21.90 per common share earnings hit is not a typo.

Fiscal Year 2007 2008 2009 2010 2011
Revenue ($) in millions 9,082 8,267 7,212 7,150 7,121
Diluted EPS ($) 2.66 (21.90) (0.03) 0.79 0.38

 

The EPS hit in 2008 amounts to an operating loss of about $1.9 billion and a net loss close to $1.7 billion. This was caused by a 9 percent drop in total sales as well as a substantial write down related to the collapse of Lehman Brothers.

After two quarters of modest growth, revenues dropped 14.4 percent in the quarter ending June before climbing 8.8 percent in the following period.

Quarter Sep. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012
Revenue ($) in millions 1,775 1,836 1,873 1,602 1,745
Diluted EPS ($) 0.25 0.04 0.06 0.12 4.92

 

Positive EPS growth for the last three periods is attractive. That huge gain in the third quarter is the related to the extinguishment of non-recourse debt guaranteed by Lehman Brothers, which accounted for diluted EPS of $4.73, or 96 percent of the quarter’s EPS. Without the gain, OfficeMax would have still posted earnings growth.

T = Trends Support the Industry in which the Company Operates

The financial collapse in 2008 hit OfficeMax particularly hard, and the poor economic recovery since has offered nothing but resistance. Annual growth for the office supply industry between 2007 and 2012 is down 3.6 percent, and some obviously but ostensibly superficial trends have worked against it…

The digitization of paperwork has affected sales of stationary and printing ink, the ubiquitous rise of email has hurt sales of mailing supplies, the rise of Amazon.com (NASDAQ:AMZN) as pulled customers out of the store, and the economic slowdown has hurt small businesses, which are a significant customer base.

The effects each individual trend are difficult to quantify, but the overall impact is obvious: sales have done pretty much nothing but suffer, which is reflected in the yearly revenue results.

Conclusion

OfficeMax has clearly had a great year on the stock chart and while its revenues are still shaky, they appear to be strengthening. Investors who bought this stock below $5 or even $6 have probably laughed at the markets while they watched their investment grow.

But there are still significant economic and industry downsides weighing on the company. The data clearly indicate struggling sales and most analysts remain bearish on not just the industry but OfficeMax as well, despite its performance in 2012.

Because of this, and the metrics mentioned above, OfficeMax is a WAIT AND SEE. It would be unsurprising to see the price normalize around its current level. The company’s stock performance this year is more likely due to it recovering from being under priced and not the result of its strong performance.

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