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Looking for a sign that the economy is rebounding? Check out the significantly higher sales activity in recent months at the major players in office equipment and supply distribution. In part, "a more buoyant U.S. economy has helped reactivate some orders that were deferred following the events of September 11," notes Value Line analyst David Cohen.
Of the two leading names in the group -- Office Depot (ODP
) and Staples (SPLS
) -- the latter has been drawing more investor attention in the past few weeks, based on both technical and fundamental grounds. Shares of Staples, one of the largest office-supply superstore chains in the U.S., have doubled in the past seven months -- from $11.10 a share on Sept. 27, 2001, to $22.45 on Apr. 10, before easing to $20.39 on Apr. 22.
Staples operates more than 1,400 store worldwide, including 1,066 in the U.S., 195 in Canada, and 175 stores in Europe -- mainly in Germany and Britain.
"SIGNS OF CONFIDENCE." "We like Staples as a play on the recovery in business spending as the U.S. economy continues to rebound," says Kevin Lane, chief market strategist at Technimentals Research Group, an independent research company that provides what it calls "unbiased research" to portfolio managers, hedge funds, trading desks, and other areas of money management.
Lane says technical factors, such as an "extensive base-building" in the stock and signs of accumulation suggest that large buyers are "catching on to the Staples story." That story, says Lane, includes the company raising its earnings and sales guidance for full-year 2002. In 2001's fourth quarter, Staples beat estimates by 10%. The upward earnings guidance, says Lane, and renewed strength in the economy "lead us to believe that earnings estimates are still too low."
How about the stock's technical attraction? Lane says the large price moves accompanied by volume surges are "sure signs of growing institutional investor confidence" in the stock. According to Technimentals' analysis, "volume equates to investor confidence and conviction." Right now, Staples is "firing on all cylinders in that department," argues Lane.
EARNINGS JUMP. The base-building that the stock has put in place -- coupled with the return of institutional investors as demonstrated by the increased money flowing into the stock -- suggests that Staples can reach 30 a share in the next six to nine months, forecasts Lane.
Value Line's Cohen says Staples' North American stores, which account for 65% of total sales, should begin rebounding in fiscal 2002, which ends Jan. 31, 2003. Last year, sales declined by 4%, and earnings, excluding restructuring charges, dropped 23%. This year and next, Cohen says, North American earnings may well increase 10% to 15%. The jump will be driven by Staples' renewed focus on higher-margin private-label products, improved customer services for certain categories, and the rollout of a new store format, says Cohen.
One growth area is Staples' Internet sales in North America, which doubled last year to about $1 billion. In fiscal 2002 and 2003, cybersales will increase by some 25%, estimates Cohen. But some of that will cannibalize revenue from two other segments -- contract sales to large clients and catalog sales. He figures that total sales will jump from 2001's $10.7 billion to $11.2 billion in 2002 and $12 billion in 2003. In 2001, net income was $308 million, and Cohen estimates that will rise to $375 million in 2002 and $440 million in 2003.
"BETTER-BUYING." Analyst Dan Wewer of Deutsche Bank Securities, who rates the stock a buy, says Staples is likely to see improved operating margins, increased returns on invested capital, and positive same-store comparative sales. He notes that operating margins started rising two quarters ago. Wewer says Staples has installed new technology that manages inventory, in part by making certain that supply is more accessible to customers.
And a newly impledmented "better-buying" method, such as seeking price reductions of 1% from Staples' vendors, will lead to better gross margins and shorter cash-conversion cycles, says Wewer. When these cycles are shorter, they tend to bolster the balance sheet, he adds. Wewer thinks these moves could generate savings in 2002 of $70 million.
Throw in a better merchandise mix, says the analyst, and Staples should generate an additional $70 million in gross profit in 2002. After earning 66 cents a share in 2001, Staples should hit 80 cents in 2002 and 95 cents in 2003, according to Wewer.
If such bullish forecasts are right, the stock could become a staple in many portfolios in the environment of a rebounding economy.
Copyright 2002, Bloomberg L.P.
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