Is Staples Undervalued?

With shares of Staples (NASDAQ:SPLS) trading around $14, 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:

T = Trends for a Stock’s Movement

Staples is an office products company that operates in three business segments: North American Stores & Online, North American Commercial and International Operations. The company serves businesses of all sizes and consumers around the world. Business products and services are essential to consumers and producers for day to day opeations. So long as companies and consumers continue to transact and interact, business opportunities will arise. Look for companies like Staples to see rising profits as consumers and businesses continue to grow across the globe.

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T = Technicals on the Stock Chart are Strong

Staples stock has suffered over recent years and it is displaying a downtrend extending back to early 2010. The stock has seen a bounce in recent times and may be getting ready to break this downtrend. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Staples is trading above its rising key averages which signal neutral to bullish price action in the near-term.

SPLS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Staples options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Staples Options

37.84%

86%

83%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Staples’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Staples look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-71.03%

-289.36%

-28%

-3.57%

Revenue Growth (Y-O-Y)

3.04%

-1.97%

-5.52%

-1.10%

Earnings Reaction

-7.14%

2.57%

-14.63%

-5.69%

Staples has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been disappointed with Staples’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

How has Staples stock done relative to its peers, Office Depot (NYSE:ODP), OfficeMax (NYSE:OMX), United Stationers (NASDAQ:USTR), and sector?

Staples

Office Depot

OfficeMax

United Stationers

Sector

Year-to-Date Return

26.45%

20.27%

19.16%

8.26%

19.92%

Staples has been a relative performance leader, year-to-date.

Conclusion

Staples provides essential business and consumer products to people operating in a large number of countries and industries. The stock has not done so well lately but it may be getting ready to break this trend. Earnings and revenue figures have been decreasing, over the last four quarters, for Staples which has not made investors too happy. Relative to its peers and sector, Staples has been a year-to-date performance leader. WAIT AND SEE what Staples says this coming earnings announcement.

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