Starboard Value Continues to Buy Office Depot in Bulk

Last week Office Depot Inc. (NYSE:ODP) saw one of its largest shareholders increase its stake to over 15%. Back in September we noted that Starboard Value had taken an over 10% stake in Office Depot, and Starboard has been buying up Office Depot shares over the past week in the range of $2.25-$2.36, now owning over 42 million shares of Office Depot—see all insider purchases. Our question is: what exactly does Starboard see in Office Depot? Starboard Value is a nimble firm with around $1 billion of AUM. Jeffrey Smith founded the firm in 2002 and focuses on activist positions grounded in fundamental analysis—see all of Starboard’s holdings here.

Jeff Smith

Office Depot appears to be joining the ranks of some of its competitors as a turnaround story. Its most recent quarter was a disappointment, though, with results showing continued weakness. Office Depot has made note of its possible future opportunity for reducing its stores’ square footage and opening smaller outlets. However, just as fellow retailer Best Buy Co., Inc. (NYSE:BBY) is trying to focus on smaller stores, the initiative is expected to take several years. Best Buy hopes to reduce cost by $800 million by 2015, and will close fifty U.S. stores this year, while opening 100 mobile-focused stores. Yet, Best Buy has the ability to refocus on international markets, planning to open fifty stores in China in 2013.

RadioShack Corporation (NYSE:RSH) is a much better comparable for Office Depot than Best Buy. Just as RadioShack is looking for a lifeline in the electronics retail industry, Office Depot might soon be doing the same. The issue with RadioShack, much like other consumer electronics companies, is a decline in top line revenues. Major electronics retailers have become a destination for customers to learn and try-out products before buying them from cheaper online retailers, namely Amazon.com, Inc. (NASDAQ:AMZN). The distinct advantage that RadioShack and Best Buy have over Amazon, or other retail companies, such as Office Depot, is their specialization on informing consumers. Thus, less tech-savvy consumers still go to retail stores to learn about products. However, as more tech companies, such as Apple, make their products more user-friendly and intuitive, brick and mortar retailers will see even more pressure.

OfficeMax Incorporated (NYSE:OMX), like Office Depot, is expected to post a decline in 2012 sales, at 1.2%. The company has been closing underperforming stores in an effort to cut costs. This has helped the company beat earnings estimates each of the last four quarters, and carrying the stock up 60% year to date. However, we believe the run up in the company’s stock, currently trading at 25x earnings, may be overvalued given expected headwinds, due to a continued economic slowdown and the expected drop of same-store sales of 0.8%.

Office Depot’s much larger competitor Staples, Inc. (NASDAQ:SPLS) expects flat sales in 2013. Staples is also downsizing stores in an effort to improve profitability. At Staples international, specifically in  Europe, exposure continues to be a drag on the company. Although the market for office suppliers is flush with competition, we believe that Staples has the greatest flexibility to withstand a prolonged economic slowdown, especially given the company’s strong balance sheet. Staples has a debt-to-equity ratio of 0.2, while Office Depot has a debt ratio of 1.0 and OfficeMax is at 4.0.

Office Depot is down almost 90% over the last five years and sales are expected to grow 5% in 2012. The biggest headwind for the company is increased competitive pressures. This, coupled with a weak economic environment, will continue to pressure the company. Office Depot missed last quarter EPS estimates by over 50%.

Office Depot appears to trade attractively on a valuation basis at a P/E of 8, and the company’s forward P/E ratio is 29, whereas Staples’s trailing P/E is also near 8. While its earnings metrics look bullish, investors may be pulled into a value-trap, at least until Office Depot can shore up its stability. Staples, on the other hand, is a much larger and more stable company, and we believe it will perform better than Office Depot over the longer term. Hawkins Capital also believes in Staples, taking a new position in the company during 2Q that made up over 6% of the firm’s 2Q 13F portfolio.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!