Does OfficeMax Offer Investors Good Value?

| About: OfficeMax Incorporated (OMX)
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Today I would like to take a look at OfficeMax (NYSE:OMX) and analyze whether or not it offers a good value to investors at its current price point. I believe that investors should take a look at this company currently because of its current and forecasted earnings and also because of the recent news that has come out about the pending IPO of Boise Cascade (NYSE:BCC). OfficeMax has about a 20% stake in Boise Cascade sitting on its balance sheet. Analysts have come out with differing estimates as to what this stake could potentially be worth, which I find interesting. In this article, I will present my assessment of this value.

A little bit of background on OfficeMax's price performance in 2012 is as follows. The 52 week range for OfficeMax as of 12/7/12 is $4.10 for a low and $10.62 for a high. This high was reached on November 16th, 2012, when the Boise Cascade IPO news went public. OfficeMax was at $4.89 on January 3rd and was at $9.70 on December 7th, for a year to date return of 98.36%. That is a great return but, as we know as investors, past results are not indicative of future returns.

To determine the value of OfficeMax currently and to determine whether or not it should be considered as an investment, I looked at a variety of factors. First of all, I noted the current market capitalization as of 12/7/12 of $841.42 million.

Next, I wanted to determine what I would estimate the value of OfficeMax's stake in Boise Cascade to be. To determine this, I looked at the S-1 filed. According to the filing, it is determined that OfficeMax owns a 20.4% stake in the company. Sales for Boise Cascade were $2,240,591,000 in 2010 and were $2,248,088,000 in 2011. For the nine months ended September 30th, 2012, sales were $2,084,482,000. This looks to mean that total sales for the entire year of 2012 will be higher than in 2010 or 2011. Also, there is net income of $40,218,000 for the nine months ended September 30, 2012, versus net losses for every previous year shown except for 2007.

To determine an appropriate value for the company after the payment for Boise Cascade is eventually received, a benchmark must be established. Looking at Weyerhaeuser (NYSE:WY), which is a similar company, their estimated sales for 2012 per the analyst consensus are $6.81 billion. Their enterprise value is $18.25 billion as of 12/7/2012. This gives them an enterprise value of 2.68 times sales. They have shown more consistent profit than Boise Cascade over the past few years so that valuation seems too high for Boise Cascade. If we assign a valuation of 1.25 times sales to Boise Cascade, that would give us an enterprise value of $3 billion for Boise Cascade, if we assume total sales for the entire year of 2012 will be $2,400,000,000. Here are some differing values for this assuming different multiples being even more conservative.

Boise Cascade Enterprise Values

1.20 times sales $2,880,000,000
1.00 times sales $2,400,000,000
.80 times sales $1,920,000,000

OfficeMax owns 20.4% of Boise Cascade, so even at .80 of sales, Boise Cascade would be worth $391,680,000 to OfficeMax. At .40 of sales, it would give OfficeMax's stake a $195,840,000 value. As you can see below, this is closer to the percentage of enterprise value to sales of Staples (NASDAQ:SPLS). The office supply retailers are not a good benchmark for this valuation because their business structure is different and it looks appropriate for a building products company to sell for a much higher multiple of sales. If we assume a $260,000,000 value for OfficeMax's stake, this will become part of the company's worth.

Next, we have to determine what the remaining company is worth based on its business. That I established by comparing the sales and enterprise values of OfficeMax , Office Depot (NYSE:ODP), and Staples (numbers in this table are in thousands). 2012 sales are estimated using the consensus current analyst revenue estimate and the enterprise values are as of 12/7/2012.

Sales 2012 analyst estimate 2011 2010
ODP $10,880,000 $11,489,533 $11,633,094
OMX $6,980,000 $7,121,167 $7,150,007
SPLS $24,690,000 $25,022,192 $24,545,113

Enterprise Value

ODP $995,700,000
OMX $1,360,000,000
SPLS $8,370,000,000

Next, I looked at how the companies are valued per their enterprise values compared to their sales. For Office Depot, its enterprise value equals 9.15% of sales. For OfficeMax, its enterprise value equals 19.48% of sales. For Staples, its enterprise value equals 33.9% of sales.

Now, we want to value OfficeMax after it no longer has the investment in Boise Cascade on its books by using these enterprise values and percentages of sales for the company. Taking a look at EPS for the three companies is helpful for this. 2012 EPS is based on analyst consensus full year numbers.

EPS 2012 2011
ODP $.01 $(.03)
OMX $.76 $.61
SPLS $1.38 $1.38

Staples is almost twice as profitable as OfficeMax per share now, but currently the enterprise value of OfficeMax is 19.48% of sales versus 33.9% for Staples. This disparity, I believe, is partly due to the large investment of Boise Cascade that OfficeMax has. Once it is no longer on the books, I expect to see the percentage of enterprise value to sales drift lower, closer to what Office Depot has but obviously not as far lower because OfficeMax is much more profitable. Office Depot's enterprise value is close to its market capitalization. For this comparison, let's base it on OfficeMax's market capitalization, which is significantly less than its enterprise value (its market cap to sales currently is 12.06%). Discounting for this, let's assume the company is left with 10% of sales to market capitalization (closer to what Office Depot has with its enterprise value to sales but revising upward to reflect its higher profitability. (Office Depot's current market capitalization to sales is about 8.65% incidentally.) 10% of $6,980,000,000 is $698,000,000.

In conclusion, if OfficeMax's core business is worth $698,000,000 in market capitalization plus $260,000,000 for its Boise Cascade investment (which is a conservative figure in my opinion), the company's current market capitalization should be around $966,000,000. There are 86,740,000 shares outstanding. This would give a per share price of $11.14 per share, a nice return if it can be achieved. The shares traded close to that point, at $10.62 for the high the day the deal was announced, but that left limited upside in my opinion. At current levels, it leaves a higher margin of safety.

Disclosure: I am long OMX, SPLS. I also have covered calls against some of my positions in both OMX and SPLS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.