What PCs could not do, tablets are finally doing. They are cutting demand for paper.
A RISI study indicates paper demand could be cut as much as 21% from 2010 levels in 2015, due to the rise of tablets and ebooks.
This is negative for office product retailers like Staples (SPLS), Office Depot (ODP) and OfficeMax (OMX) not because they make their money from paper, but because so much of their walk-in traffic depends on paper-related purchases.
It's true that Staples is up 10% today on an earnings beat, and the others are up in sympathy, but that may just be like the last call at a bar. You can keep drinking if you like, but you can't do it here.
Think about it. Pens, folders, printers, ink, shredders. They are all bought at office supply houses, just as typewriters once were. It's true that these stores do stock tablets and PCs, but they are not huge players in those markets, and with people making fewer trips there are fewer touch points.
Yes, they have online stores, but so does everyone else. Nothing online is as special as the touch of a store visit.
While Office Depot and OfficeMax are up this week, over the last year all three have lost from 16-31% of their value, with OMX the leader to the down side. Its rise, like that of OfficeDepot, is fueled by speculation the companies might merge.
But even this would be a 1+1=1 deal. Office Depot is worth about $750 million. OfficeMax is worth about $500 million. Together that's a tiny fraction of Staples' $10.5 billion market cap. All three are at an implied PE of about 13, but that's pure implication in the case of Office Depot, which has been losing money lately.
More important for investors than mergers or the trade, however, is the long-term health of the sector, which in the tablet era is pretty sick. None stock the iPad, although Staples hides this lack by combining tablets and PCs in its online store.
Even if they were able to get in Apple products they would not be key players in that channel. Apple owns its channel, thanks to its stores and its iTunes store, to a degree no previous computer retailer ever has. Thus the office product guys are stuck with brands like Samsung, HP (HPQ), and BlackBerry (RIMM), to go alongside products with weakening long-term demand.
A lot of investors became inured over the years to the idea that PCs would not threaten paper or office product markets because it seemed that in the PC era people actually printed more stuff. That's true. But it's not true any more.
And if you still have stock in these retailers, it's probably time to get out of them while the getting is good.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.