Back on May 18th, 2011, Staples Inc. (SPLS-Q) plummeted 15.4% to close at $16.63, from $19.65 per share, after missing earnings expectations. It did not recover its share price, and was again walloped with the massive market sell-off that occurred in early August. It closed to a low of $12.49 per share by August 10th, 2011. But with so many other big-blue chips on sale during those few days, and limited funds to invest, Staples was certainly not at the top of my buy list. There were many more other great U.S. Stocks to choose from such as Pepsi, Procter & Gamble, Home Depot, Wal-Mart, etc. I was also waiting for an indication of a turnaround in Staples share price before purchasing.
I reviewed Staples and the undervalued office sector back on May 24th, in Staples Inc. Value in Office Supplies? I found that Staples was the dominant player in the office sector, dwarfed its competitors, and had low debt. It appeared to be a well managed company stuck in the retail sales doldrums. In addition, its main competitor Office Depot (ODP-N) had already started closing its Canadian retail locations. In a sense, all these factors give Staples an economic moat in the office supplies sector.
Many retail stocks back in May were out of favour, due to a lack of consumer confidence and spending. So I kept Staples on my watch list, even with its low dividend yield of only 2%, with the intention to purchase before September back to schools sales. With its closing share price today of $14.29 and the current dividend yield of 2.8%, Staples was looking an attractive buy opportunity. More importantly, with some money to go shopping with in my RRSP, I purchased a position in Staples at $14.00 per share this afternoon.
Profits Back on Track
This morning a Globe and Mail article indicated that Staples had indeed regained its retail dominance in the office supply sector, and that its profits were back on track – Staples Profit Climbs on Foreign Sales. According to the article, net income for the three months ended July 30th, rose to $176.4-million (U.S.), or 25 cents per share, from $129.8-million, or 18 cents per share last year. Revenue rose 5 percent to $5.82-billion. As I had mentioned in my previous article, Staples is not an unprofitable business. Back in May it had missed analysts’ expectations during a retail slump. With back to school sales already starting, I felt it was time to make a move on Staples now or never.
The Reasons to Buy
Buying value stocks, from a price point of view, often means buying what is unpopular or flies under the radar. The retail office sector, I believe is one of those undervalued and unnoticed areas – until recently. September is one of the most influential months for this sector, with Christmas sales following in December. From an investment point of view, buying in August for an industry that makes most of its profits from September to December just makes good sense. This should be an interesting retail play.
The reasons on my decision to buy Staples Inc. (SPLS-Q) include the following:
- Back to school sales in September will no doubt boost profits, and Staples bottom line.
- Christmas retail sales in December follow shortly after.
- Staples is the dominant player in the office supplies sector, and dwarfs its competition. It has 10.2B in assets which is nearly eight times the market cap of OfficeMax (OMX-N) and Office Depot (ODP-N) combined. It was 6 times the market cap back in May.
- Staples also has low debt, especially when compared to its competitors.
- Office Depot has already closed its Canadian retail locations.
- Staples is a dividend paying stock, and its competitors do not pay dividends.
- The potential growth from a price point of view, IMO, outweighs the lower paying dividend.
Readers, what’s your take? Do you think Staples is a good value play, or a value trap?
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