Is it Time to Stay Away from Office Depot’s Stock?

With shares of Office Depot, Inc. (NYSE:ODP) trading around $3.30, is ODP 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:

C = Catalysts for the Stock’s Movement

Shares of Office Depot have come up over 76 percent in the last three months. The big news on the street is that activist hedge fund Starboard Value LP has been pushing for significant changes at the company, and they may or may not be welcome by the other shareholders.

As of October 12, Starboard owned a 14.8 percent stake in the company, and Office Depot has adopted a poison pill as a defense against any aggressive take over that triggers at 15 percent ownership. It’s unclear if the poison pill will cause Starboard to unwind its position or if they will stick with the cause — but a quick gain could look pretty attractive versus fighting a hostile board.

E = Equity to Debt Ratio is Close to Zero

With a debt-to-equity ratio of 0.63, Office Depot falls in between its competitors. OfficeMax Incorporated (NYSE:OMX) has the highest debt-to-equity ratio of the major office suppliers at 0.89, while Staples, Inc. (NASDAQ:SPLS) has the lowest, at 0.27.

It’s also important to consider total cash on hand as well as total debt, which for Office Depot is $619.53 million in cash and $671.11 million in debt. OfficeMax has just $506.02 million in cash with a relatively high debt of $971.39 million, while Staples has the largest war chest at $1.02 billion and debt of $1.66 billion.

T = Technicals on the Stock Chart

The stock price was recently 6.14 percent above its 20-day simple moving average, or SMA; 20.76 percent above its 50-day SMA; and 30.78 percent its 200-day SMA.

Since the beginning of 2012 the stock price has been in a fairly pronounced upward trend, rising 53.95 percent this year-to-date and rising 35.66 percent year-over-year.

For comparison, shares of OfficeMax have come up over 99 percent this year to date, while shares of Staples have come down over 19 percent for the period.

As a benchmark, the S&P 500 has risen 12.61 percent year-to-date, and has risen 12.31 percent year-over-year.

E = Earnings are Not Increasing Quarter over Quarter

Office Depot’s revenue and earnings over the past five years look a lot like its competitors, and while that may mean even footing, it’s objectively a tough spot to be in. Office Depot’s revenue has dropped each of the last four years, peaking with a 16 percent drop in 2009. By 2011, revenues decreased at a rate of just 1.23 percent.

Fiscal Year 2007 2008 2009 2010 2011
Revenue ($) in millions 15,530 14,500 12,140 11,630 11,490
Diluted EPS ($) 1.43 (5.42) (2.003) (0.2294) 0.1681

 

Like OfficeMax, Office Depot took a massive earnings hit in 2008 because of the financial collapse and has yet to fully recover.

Quarter-over-quarter revenue and earnings growth is shaky, oscillating between losses and gains that are not totally out of sync with the company’s stock chart.

Quarter Sep. 30, 2011 Dec. 31, 2011 Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012
Revenue ($) in millions 2,837 2,970 2,873 2,507 2,693
Diluted EPS ($) 0.28 0.0232 0.14 (0.1779) (0.1916)

E = Excellent Poor Performance Relative to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is performing. Office Depot currently provides an unattractive return on equity of -11.28 percent. This return is even less attractive given the relative strength of its competition. Staples has an ROE of just 0.49 percent, but OfficeMax has a whopping ROE of 54.91 percent.

Operating margins are also critical for stock evaluation, and Office Depot does not look so hot on this metric, either. The company has a margin of -0.33 percent. This compares to Staples with a margin of 2.74 percent and OfficeMax with a margin of 10.74 percent.

T = Trends May Not Support the Industry

All of the major office suppliers have suffered tremendously since the financial collapse. Not only have economic headwinds slammed the breaks on revenue and earnings growth, but the rise of e-commerce platforms like Amazon.com (NASDAQ:AMZN) has forced them against a wall.

A 7.3 percent annualized revenue loss between 2007 and 2011 is evidence of this, and an extremely high beta of 2.98 suggests that that the stock moves more on price gamesmanship than actual performance — 72 percent of the shares outstanding are owned by institutional investors.

Conclusion

Based on the metrics and trends above, Office Depot’s stock looks like it could be at the top of a run and may face selling pressure soon. The mean analyst price target of $3.26 per share is below its current price and those same analysts maintain an emphatic “Hold.”

While there may be some upside in the long-term, it looks like there could be substantial downside for Office Depot in the short term. Because of this, ODP is a STAY AWAY.

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