Markets & Finance

Time to Lay Off Office-Supply Stocks?


S&P says the group's momentum continues to wane, and its fundamental outlook is negative. But a few names are worth buying

From Standard & Poor's Equity ResearchOver the past 13 weeks, the S&P 1500 Office Services & Supplies subindustry index fell from a relative strength ranking (RSR) of 3, indicating that its trailing 12-month price performance was in the middle 40% of all 136 sub-industries in this composite benchmark (which consists of the S&P 500, MidCap 400, and SmallCap 600 Indexes) to an RSR of 2. This means it's now in the bottom 30%.

Year to date through May 11, the S&P Office Services & Supplies Index rose 1.5%, vs. a 6.6% gain for the S&P 1500. In the past 13 weeks, this subindustry index fell 1.6% while the market climbed 4.8%.

Take a look at the accompanying chart of this subindustry index's rolling 12-month price performance compared with that of the S&P 1500. Any point above 100 indicates sector outperformance vs. the S&P 1500 over the prior year, while points below 100 show sector underperformance. The red line is a rolling nine-month moving average, while the two green bands indicate one standard deviation above and below the index's longer-term mean relative strength.

Mail Matters

Zaineb Bokhari, the analyst who prepares the S&P 1500 Office Services & Supplies subindustry outlook for S&P, says the fundamental outlook for the subindustry is negative. S&P's outlook reflects its belief that the market will continue to see slow spending by enterprises on office-related purchases. According to Bokhari, S&P believes that there has been some improvement in spending by small- to medium-sized business. But the large enterprise, a key driver for large-scaled office equipment, supplies, and services, continues to lag overall economic growth, in its estimation.

Longer term, S&P looks for demand to come from improving global economies and new products focused on cost efficiencies, but it also see aggressive competition and price erosion.

The mailing equipment and supplies industry is narrow, with only a few competitive multinationals offering products and services. These include production mailing, document management, and outsourcing. Companies are currently in the fourth phase of the USPS-mandated digital-meter migration, and are promoting their digital mailing meter families, emphasizing security, data collection, and cost efficiencies.

Forms and Furniture

Bokhari says S&P expects more aggressive competition as dynamics in the mailing arena change, due in part to postal-reform legislation. S&P looks for first-class and priority mail volumes to decline as demand for electronic bill payment accelerates and third-party carrier services become more competitive. Meanwhile, standard mail volumes should accelerate slightly, driven by direct-mail marketing.

The business-forms industry is declining, in S&P's view, as the expansion of electronic media, direct mailers, and document outsourcing has resulted in decreasing sales. S&P expects intense competition, with an emphasis on price, quality, accuracy, and speed of delivery. Bokhari says S&P expects limited growth and continued consolidation, as well as cost-cutting initiatives. The office-furniture industry is a mature market with aggressive competition, where S&P believes price, on-time delivery, a broad product line, and service are essential.

So there you have it. The group's longer-term momentum continues to erode, and its overall fundamental outlook is negative, indicating that from both a fundamental and momentum perspective, there's limited upside potential. S&P does favor some stocks in the group, including Avery Dennison (AVY), Knoll (KNL), and Herman Miller (MLHR), each of which carries a 4 STARS (buy) investment ranking.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the 136 subindustries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry

Company

S&P STARS Rank

Price (5/11/06)

Commercial Printing

R.R. Donnelly (RRD)

4

$43

Consumer Electronics

Harman Intl. (HAR)

3

$120

Diversified Metals & Mining

Freeport-McMoRan Copper (FCX)

3

$73

Electric Utilities

Excelon (EXC)

4

$77

Fertilizers & Agr.l Chem.

Monsanto (MON)

3

$59

Gas Utilities

Questar (STR)

4

$99

Independent Power Producers

AES Corp. (AES)

4

$23

Integrated Telecom. Svcs.

Citizens Communications (CZN)

4

$15

Internet Retail

Amazon.com (AMZN)

2

$62

Metal & Glass Containers

Ball Corp. (BLL)

4

$53

Office REITs

Boston Properties (BXP)

3

$117

Retail REITs

Simon Property (SPG)+

5

$112

Steel

U.S. Steel (X)

4

$111

Tires & Rubber

Goodyear Tire (GT)

3

$33


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