Dumpster Diving at Office Depot

Office Depot (ODP) is a book value play: trading today just over 1.00, tangible book value comes in at 4.69 per share. The company is coming off several poor years, with heavy write-offs in the 4^th quarter 2008, leading to a loss of 5.42, much of it non-cash goodwill impairments. Business prospects are mediocre, so what's the catalyst?

Three or four years ago I read an article that said increasing free cash flow with a price turn (upwards) was an effective way of picking winners. I ran a screen, didn't like the looks of the prospects, and saved the group of them as a test portfolio. To my chagrin, that portfolio outperformed my hand-picked gems. Many of the stocks generated by the screen were dogs, or so I thought; but there was money to be made, as the outcome demonstrated.

Here's the thing – from a 3/10/09 low of .60, ODP is now over a dollar, which would be the price-turn. For free cash flow, the company is opening far fewer stores this year, closing a goodly number, and planning actions that could add 400 million to liquidity during 2009. Dividing that by 280 million shares, I get 1.42 additional cash per share. With the shares trading around a dollar, the possible additions to cash are more than the price of the shares. The following table compares operating cash flows to investing activities (capex) for the past three years and then adds estimates for 2009 (click to enlarge image):

So, the price just turned, and if management is successful in meeting their own plans, free cash flow will be increasing. In September of 2007 I bought some ODP at 20.03, citing price/cash flow and seeing value. I sold it soon thereafter (thankfully), and continued to track the stock, looking for a bottom. Perhaps the .60 was it.

Disclosure: Author holds a long position in ODP

Comments

[toobad41]

Hope it does not go to the pink sheet....that would be death. Compared to Staples (which is just less than a mile down the street from Office Depot) it is not looking so good.

2009 Mar 12 11:25 AM

[Aryamehr]

If one was to pick ten dogs trading between $1 to $5 you would be far better off than picking ten blue chip companies. Lets look at a few of these dogs; Ford, Saks, Sprint, Citi, Bank of America, Office Depot, Alcoa, MGM, LVS & AMD. Now compare these stocks with the likes of Apple, Msft, CSCO, Dell, INTU etc and I will guarantee you that the latter heavy weights will lag the first group over a five year period. Remember investing requires patience even though it is bitter but by God the fruits are very sweet. The first group are were trading at values as though the US would implode, if that was to be the case who cares because the world only comes to an end once. On the other hand if you have faith in the survival of the US economy then rest assured majority of those dogs will survive and do extremely well. They are a diversified group and even if a couple of them go belly up into bankruptcy you will still be better off owning them in lieu of the heavy weights.

2009 Apr 10 11:34 AM

[Tom Armistead]

Good point - this would be the Phoenix Strategy, Cam Hui did a nice article about it here on Seeking Alpha. taking his suggestion, I got very good results loading up on some of my picks that were under 5.00 shortly after the most recent bottom.


On Apr 10 11:34 AM Aryamehr wrote:

> If one was to pick ten dogs trading between $1 to $5 you would be
> far better off than picking ten blue chip companies. Lets look at
> a few of these dogs; Ford, Saks, Sprint, Citi, Bank of America, Office
> Depot, Alcoa, MGM, LVS & AMD. Now compare these stocks with the
> likes of Apple, Msft, CSCO, Dell, INTU etc and I will guarantee you
> that the latter heavy weights will lag the first group over a five
> year period. Remember investing requires patience even though it
> is bitter but by God the fruits are very sweet. The first group are
> were trading at values as though the US would implode, if that was
> to be the case who cares because the world only comes to an end once.
> On the other hand if you have faith in the survival of the US economy
> then rest assured majority of those dogs will survive and do extremely
> well. They are a diversified group and even if a couple of them go
> belly up into bankruptcy you will still be better off owning them
> in lieu of the heavy weights.

2009 Apr 10 05:08 PM