Buy Staples Staples, Inc. (SPLS) for 25% Upside: Office Depot Inc (ODP), OfficeMax Inc (OMX)

Staples (SPLS)Recently, I wrote an article on the merger of Office Depot Inc (NYSE:ODP) and OfficeMax Inc (NYSE:OMX).

I discussed in detail how the merger’s premature announcement led to a massive rise in the respective stocks the day the announcement was put on Office Depot Inc (NYSE:ODP)’s website. However, the stocks have been falling since the formal announcement of a merger given that many important details were not given to investors.

However, what I intentionally left out was the discussion on how the number one office-supply retailer, Staples, Inc. (NASDAQ:SPLS) will be affected by this merger. I must say that discussion on this merger is incomplete without the mention of its impact on the competitors. Normally, it’s a bad news for a company that its competitors are tying up to become a big enterprise. However, this is not the case for Staples, Inc. (NASDAQ:SPLS).

No reason why shares of Staples, Inc. (NASDAQ:SPLS) spiked up by 13% on the day the merger was announced. Why the market thinks that Staples will be a beneficiary remains unanswered. Let’s have a look at it:

Benefits to Staples, Inc. (NASDAQ:SPLS

I will suggest my readers to first go through my post which adequately points out how saturated the office-supply retailer market is. Given the saturation that the market is currently experiencing, any merger of two players will definitely provide some space to the competitors. How? The following estimate tells us:

Together, OfficeMax and Office Depot Inc (NYSE:ODP) have approximately 2,074 doors with the largest overlap in the SE and the Midwest. It is estimated that if the combined company were to close 500 doors (~24.1% of total doors) with 50% of those sales captured by Staples, it could benefit Staples’ sales by $2.17 billion in FY14, or add approximately $0.13 (or 10% upside) to Staples’ FY14 EPS.

Overall Thesis on Staples

Apart from the upside that we see in the form of the merger of ODP and OMX, Staples seems to be an attractive story for the investors. The company is expected to report on Mar. 6.

The Street believes that Staples will be in transition mode in 2013. The company is focused on getting its house in order with straightforward objectives of getting back top-line growth in North America (through renewed e-commerce focus and growing adjacent categories), as well as repairing Europe. Staples’ European initiative, unlike North America, will not be about sales rejuvenation but instead will focus on business unit reorganization and cost and SKU rationalization. Cutting through the aforementioned, the potential impact from the Fiscal Cliff resolution, and that Staples is early in transition mode do not point to near-term upside for this stock. However, at 4x cash flow, and what looks like more stability in the sector, it also does not look like there is much downside. Staples screens well for value oriented investors. Another positive for 2013 is the possibility of selling Apple Inc. (NASDAQ:AAPL) products in its U.S. stores, which sounds like it is in test mode.

Foolish Bottom Line

The Street has a bullish target price of $16. This means an upside of ~21% from current levels. Not only this, the stock also pays a dividend yield of 3.32%. Therefore I recommend investors dive into the stock to benefit and potentially make a return of 25% on their investments,

The article Buy Staples for 25% Upside originally appeared on Fool.com and is written by Masam Abbas

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!