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Staples: No. 1 in the World's Offices


America's retailers are taking it on the chin as consumers get walloped by the housing slump, rising gasoline prices, and the credit crunch. But some money pros are snapping up shares of Staples (SPLS), the world's largest office-products company, which slid from 27 in March to 21.28 on Nov. 14. "Despite the very difficult retail environment, Staples continues to demonstrate its superiority vs. its peers, aided by strong foreign sales and increasing profit margins," says Alan Lancz, president of investment adviser Alan B. Lancz & Associates, which owns shares. Staples' depressed valuation creates a favorable long-term risk/reward ratio, with 10% to 15% downside from its current price, and 40% to 50% upside potential in a year or two, says Lancz. Staples pioneered the office superstore concept, and the company currently operates more than 1,900 outlets worldwide, with sales of $18.2 billion in fiscal 2007. Staples recently teamed up with Dell (DELL) to sell its computers and other products. That is a "very positive development," says Christopher Graja of Argus Research, who rates Staples a buy. Staples' financial strength, its increasing foreign exposure (already 17% of sales), and emphasis on sales to businesses (32%) are favorable attributes, he says. Graja sees earnings of $1.43 a share in fiscal 2008 ending Jan. 31, and $1.68 in fiscal 2009, vs. fiscal 2007's $1.32.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

One stock defying the market's tumble is Owens-Illinois (OI), a maker of glass containers. OI climbed from 17 a year ago to 44.85 on Nov. 14. "The reason is earnings momentum," aided by the August sale of its plastic packaging unit, says Brett Hawkins of investment firm Thompson, Siegel & Walmsley, which owns shares. The momentum, he adds, will continue as world demand for glass containers rises. Third-quarter profits of 78 cents a share, exceeding consensus estimates, prompted Richard Skidmore of Goldman Sachs (GS) (OI was a client) to upgrade the stock from neutral to buy. OI has beaten estimates for four quarters, he notes. Skidmore upped his 2007 earnings estimate from $2.20 a share to $2.36 "as margins expanded faster than expected," he says. For 2008, he foresees $2.90.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

When little-known biopharma Biodel (BIOD) was granted a patent by the Patent & Trademark Office in September for its VIAdel technology, investors saw it as a validation of its two leading products, VIAject, an injectable insulin, now in phase III clinical trials, and VIAtab, an oral formulation of insulin. The markets for these products are estimated at $2.3 billion. Both were developed using Biodel's VIAdel technology, which reformulates existing drugs to improve their therapeutic results. Steven Harr of Morgan Stanley (MS), which owns shares and has done banking for Biodel, rates the stock, now at 14.43, overweight. He has a 12-month target of 29 for Biodel. Harr says the patent grant is a big plus and will make Biodel attractive to potential partners since the insulin products' peak sales could exceed $1 billion.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.


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