uploads/2016/02/1-Year-Total-Return-Comparison-2016-02-261.jpg

Office Depot: Why the Stock Seems to Have Bottomed Out

By

Updated

One-year total return

Office Depot’s (ODP) fundamental performance has taken a toll on the company’s stock price. A look at the price return over the last year shows that the stock fell 45%. Staples (SPLS) has fallen 40% over the same period. The industry as a whole has been under pressure from rising substitutes in the digital world as well as competition from online retailers like Amazon.com (AMZN) and eBay (EBAY) and as big-box retailers like Walmart (WMT).

Article continues below advertisement

Valuation multiple

The current price-to-earnings ratio for Office Depot (ODP)(XRT)(VCR) is 11.93x. Compared to the specialty retail industry average of 14.5x, it looks quite cheap. But you need to understand that the office supply subsector has been under pressure due to higher competition and traditional office supplies getting replaced by digital substitutes. So a discount is understandable.

Office Depot (ODP) is undergoing a transformation. Its efforts to improve its e-commerce platform, optimize stores and inventory, and benefit from synergies should drive the stock. Staples (SPLS), Essendant (ESND), and Ingram Micro (IM) are trading at current PE ratios of 9.68x, 16.85x, and 15.57x, respectively.

The Wall Street consensus is that in fiscal 2016, Office Depot’s adjusted earnings per share will grow 14%—meaning Office Depot’s forward multiple would be around 10.8x.

In the next part of this series, we’ll look at what Wall Street thinks of the stock.

Advertisement

More From Market Realist