Staples Inc. - An Easy Choice At A Great Valuation

| About: Staples, Inc. (SPLS)

Staples (NASDAQ:SPLS) is the world leader in office products with about 10% global market share. It is also the second largest overall in internet-based sales [to Amazon (NASDAQ:AMZN)]. Today's valuation appears to offer investors the most compelling entry point in history.

Fear of recession is a natural emotion in times like this. Business slows down and profits can get worse rather than grow. How severely would Staple's earnings drop in that type environment?

Luckily for us, we have a nice template; the Great Recession of 2008-09. How did SPLS fare in the good times and during that horrific period? EPS peaked in FY 2007 at $1.38, then declined slightly to $1.29 in fiscal 2008 as the recession cranked up. It hit bottom at $1.10 in FY 2009, which ended in Jan. 2010.

The stock was as high as $26.60 just prior to the Lehman bankruptcy. SPLS proceeded to double-dip to about $14 late in 2008 and again in March of 2009. [I've used the recessionary $1.10 low point in EPS in calculating the multiples for both March 2009 and year's end 2009]

In one of the worst economic climates in my lifetime (born in 1950) Staples never went below 13 times expected earnings. Profits per share declined for two consecutive years but only by a cumulative 20.3% from the all-time record $1.38 down to $1.10.

Stocks tend to discount the future and SPLS shares hit bottom well before their fundamentals did. The stock rebounded 74% by Dec. 31, 2009 even while the EPS were still dropping. If you waited for the news to be good- you missed the chance to get in on the cheap.

At 11: 42 AM Thursday SPLS was offered at $12.45. That seems outrageously inexpensive. It's lower than the nominal nadir in the 2008-09 cycle even though trailing earnings have improved to $1.39; a penny better than FY 2007's pre-recession record.

Here's a peak at what the stock has done over the past two years.

The global leader in office supply products, with $25 billion in revenue, is now priced even more attractively than it was the last recession. As noted earlier, SPLS is the world's second largest internet retailer (to Amazon) with $10 billion in online revenue.

Value Line assigns Staples an A+ for financial strength. It notes the 10-year median P/E has been 17x. Staple's earnings predictability falls in the top 5% of Value Line's 1700-company main research universe.

S&P carries a somewhat conservative fair value for SPLS of $18.20. Morningstar rates Staples at 5-Stars (out of 5). It sees fair value as $25.

Should you own Staples at a single-digit multiple? Yes.

That was easy!

Disclosure: I am long SPLS.