Can Office Depot Recover?

With shares of Office Depot (NYSE:ODP) trading around $4, is ODP 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

Office Depot is a global supplier of office products and services. The company sells a range of merchandise through its chain of office supply stores as well as its own brand office supplies, technology products, furniture and services. It operates in three business segments: North American Retail Division, North American Business Solutions Division and International Division. Office supplies are essential to the daily operations of small to large businesses across the globe. As long as businesses are in operation, companies like Office Depot are well-positioned to see revenues into the future.

T = Technicals on the Stock Chart are Mixed

Office Depot stock has seen a disastrous decline in recent years. The stock has yet to come close to a recovery from the extreme selling experienced during the Financial Crisis. 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, Office Depot is trading around most of its rising key averages which signal neutral to bullish price action in the near-term.

ODP

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(Source: Thinkorswim)

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

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Office Depot Options

45.95%

96%

92%

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

May Options

Steep

Average

June Options

Steep

Average

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As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish 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 bearish 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 Office Depot’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Office Depot 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)

-313.72%

-168.43%

-116.16%

365.15%

Revenue Growth (Y-O-Y)

-11.68%

-5.08%

-7.49%

-3.36%

Earnings Reaction

-16.73%

19.12%

-5.17%

-6.24%

Office Depot has seen decreasing earnings and revenue over the last four quarters. From these figures, the markets have been dissatisfied with Office Depot’s last four earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Office Depot stock done relative to its peers, OfficeMax (NYSE:OMX), Staples (NASDAQ:SPLS), Wal-Mart (NYSE:WMT), and sector?

Office Depot

OfficeMax

Staples

Wal-Mart

Sector

Year-to-Date Return

10.98%

17.34%

15.59%

13.52%

12.97%

Office Depot has been a relative underperformer year-to-date.

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Conclusion

Office Depot provides essential good and services to a range of business types around the world. The stock has had a tough time trending higher but may currently gaining footing. In fact, the short-term trend on the stock price seems to be pointing higher. However, earnings and revenue figures have been declining and have clearly not impressed investors. This had led to an underperformance relative to its stronger peers and overall sector. WAIT AND SEE what Office Depot does this quarter.

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