The Staples/Office Depot Merger: What Should I Do With My Stock?

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Staples, Inc. (SPLS, $16.73) announced that they will purchase Office Depot, Inc. (ODP, $9.49) for $6.3 billion.  Office Depot shareholders have been offered $7.25 in cash and 0.2188 of a share in Staples stock, with a total value of $10.91 per share, based on Staples’ closing share price on February 2.

Investors may recall that Office Depot purchased OfficeMax in November 2013.  This new merger would give Staples a monopoly in the office supply industry … something regulators may frown upon.  There is certainly a risk that the merger might not receive regulators’ approval.

You can read comments about the merger from Bloomberg.  I’m here to guide shareholders through the likely stock scenarios, to maximize their value.

 

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OFFICE DEPOT

After recording net losses in four of the five years between 2009-2013, Office Depot is expected to report a 2014 profit of $0.18 per share.  Wall Street expects Office Depot’s profit to grow to $0.45 per share in 2015, and $0.58 in 2016 (December year-end).  Regarding valuation, Office Depot’s 2015 price/earnings ratio (PE) is 21, vs. expected earnings growth of 150%, putting the stock firmly in undervalued territory.

 

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Office Depot does not pay a dividend, and the 2013 long-term debt-to-capitalization ratio was fair at 43%.

The merger news lifted shares of ODP to five-year highs, closing today at $9.49.  But the stock was rising and reaching recent highs anyway.  In that light, current shareholders should hold their Office Depot stock*, whether the deal goes through or falls through.

Between the strong future earnings growth, the bullish chart, and the merger prospects, shareholders will probably earn additional capital gains with ODP this year.

* Please note that ODP shares do not qualify for a buy recommendation at Goodfellow LLC, because I do not cover stocks with trading ranges below $18.  I know that sounds ridiculously conservative to people who are enamored with low-priced stocks, but over the decades, I have found that low-priced stocks experience much more irrational volatility than higher-priced stocks.  At Goodfellow LLC, my investment goal is to outperform the U.S. markets while minimizing risk.

Chart courtesy of StockCharts.com.

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STAPLES INC.

Wall Street is expecting Staples’ 2015 EPS to fall 19%, from $1.19 to $0.96 (January year-end), then remain flat in 2016 & ’17.  The 2016 PE is 17.4.

Staples pays a large dividend, yielding 2.87%.  The 2014 long-term debt-to-capitalization ratio is quite low at 14%.

Staples’ share price shot up yesterday on the merger news, and promptly fell back down today.  Overall, the chart has been bullish since the stock broke through long-term upside resistance in late December.

In summary, SPLS is an overvalued stock, lacking earnings growth.  The dividend is attractive and the chart is bullish.

If I owned the stock, I’d hold it for the simple reason that the chart is bullish.  I’d use a stop-loss below the recent trading range, at $16.10, with the expectation that merger volatility could cause me to lose the stock.

Under no circumstances would I purchase SPLS.  Investors who want to make money in stocks should concentrate on companies with strong earnings growth and bullish charts.  I highlight such stocks in my weekly feature article, Monday’s Buy List, on the Goodfellow LLC home page.

My most recent comments on Staples, Inc. are from Aug. 21, 2013, when I said, “With neither earnings growth nor bullish chart on the horizon, we see no reason for investors to own Staples shares.”

Chart courtesy of StockCharts.com.

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Happy investing!

 

 

Crista Huff

President

Goodfellow LLC

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