Office Depot's Working Its Way Up - Barron's

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A Lot More Than Paper Clips by Tom Sullivan

Summary: Office Depot's (ODP) 30% annual earnings increase since 2005 show it's recovered from the dot.com office bust, price wars and market share loss. Office Depot's the second-largest office products supermarket operator, with 1,158 U.S. stores and franchises in 42 countries that generate $1 billion in profits before taxes and charges. Analysts like Office Depot because 1) It's using that cash to buy back $2b in shares, grow overseas through acquisitions, open new stores (150 this year, 200 in 2008) and makeover existing ones to increase profitability and traffic. Despite over-saturation fears, industry groups say the top three: Office Depot, Staples (SPLS) and Office Max (OMX) have a combined 10% of the U.S. market. CEO Steve Odland puts ODP's share at 3.5%. 2) Office Depot's 15 P/E is lower than Staples' 18 P/E. 3) Office Depot is business-oriented-- hedging against individual consumer spending crimped by housing's downturn. 4) Moody's upgraded Office Depot's debt credit rating. 5) Office Depot's online, private label and delivery businesses offer great growth potential. 6) ODP shares are down 25% to $35 from a high of $46.52. 7) Office Depot earned $1.94/share on $15b in revenues in 2006, is expected to earn $2.31/share this year, and $2.70 in 2008, equaling 17% growth. Barron's Bottom Line: Office Depot's low P/E and earnings growth potential could mean a mid-$40's upside.

ODP 1-yr. chart:

Related Links: How Staples Got The Upper Hand Over Office Depot • Staples' Q4 Earnings: Consider Stapling This Stock to Your Portfolio • Jim Cramer' Mad Money In-Depth Stock Picks