The Non- Microsoft 'Office 2012': 2 Companies To Buy, 2 To Avoid

Includes: ESND, ODP, OMX, SPLS
by: Paul Price

There has been a lot of talk about office supply companies going the way of Borders (OTC:BGPIQ) or Best Buy (NYSE:BBY). Greater use of on-line ordering with direct delivery is a reality. Staples (NASDAQ:SPLS) did $10 billion in internet sales in 2011 and ranked #2 in the world to Amazon (NASDAQ:AMZN) in this category.

That does not mean that locally based retailers are going away anytime soon. The big box footprints may shrink but the convenience of quick delivery and nearby stores for instant pick-up remains in demand. When an office manager needs supplies ASAP, confidence that they will be there promptly often trumps absolute low prices.

The big three in this industry are Staples, Office Depot (NYSE:ODP) and OfficeMax (NYSE:OMX). Mid-cap United Stationers (USTR) complements those giants but with much more limited offerings.

A decade-long look at the per-share metrics give us a nice snap-shot view of how these companies have fared recently. USTR and SPLS have performed quite well. ODP is a bankruptcy candidate. OMX is debt-laden but trying to turn things around.

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The 10-year share price movements largely followed fundamentals. USTR and SPLS gained while ODP and OMX plunged. Neither of the winners, though, fully reflected their much improved profits. USTR went up less than 99% on a 168% rise in EPS. SPLS shares had been strong in mid-2011 but their recent pullback has them up less than 50% over the full decade on better than a 137% gain in EPS.

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10 years ago United Stationers averaged a 16.8x multiple versus about 10x today. SPLS used to command 20x but is now available for just 8.5x current FY estimates. These fine companies pay well-covered current yields of 1.98% and 3.72% at Monday morning's quotes.

Rumors of the demise of the office supply business have been grossly exaggerated. USTR and SPLS offer outstanding total return from their current low valuations. Their balance sheets look good. They have histories of steady and predictable cash flow and earnings.

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Standard and Poors chimes in with a 4-Star (out of 5) buy rating on SPLS. Their somewhat conservative $14 one-year price target is 18.5% above today's price of $11.81 and would bring more than 22% in total return including dividends. SPLS traded as high as $16.93 earlier in 2012.

S&P does not indicate a star rating or goal price for USTR.

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Unless you're convinced that this business is dead forever USTR and SPLS offer compelling value right now. I'd avoid financially weak ODP and OMX. Why play the weak sisters of the group when the best of breed are selling at bargain prices?

The best gains are always made by those who correctly see the flaws in the consensus opinion. Picking up shares of Staples and United Stationers today offers the potential for huge profits on even a partial reversion towards historical valuation levels.

Disclosure: I am long 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.