Staples Looks Ready for a Breakout

It's no secret that the recession has hit office supply vendors hard, and, despite a slightly brightening economic picture, these stocks have been slow to regain investor confidence. Staples (NAS: SPLS) , Office Depot (NYS: ODP) , and OfficeMax (NYS: OMX) have seen their values drop by 25%, 30%, and 65%, respectively, over the last year. After a little research, however, I found plenty of evidence that Staples is the best candidate out of the three to make a comeback this year.

Staples released its earnings report at the end of February, showing earnings and revenue in line with analysts' predictions. Digging deeper, I found some tasty tidbits just under the surface, including a 2% increase in North American sales from 2010 to 2011, as well as an expected cash flow of over $1 billion for the current year.

This is good news, but it gets better. A recent article in Barron's notes that the company's Internet sales have skyrocketed to $11 billion, which puts it squarely behind No. 1 retail giant Amazon (NAS: AMZN) . This is significant, in my opinion, when you consider that Staples is perceived primarily as a brick-and-mortar store, unlike Amazon, and surely doesn't have the equivalent number of products in its stable as the online retailer has. While other retailers like Best Buy are whining that they are losing customers to Amazon, Staples has shown that it has the moxie to take on the big guy -- and do it well.

Staples has also been quietly absorbing market share from rivals Office Depot and OfficeMax, both of whom are in a more tenuous position than Staples. Although all three have experienced problems rebounding from the recession, Staples is the more stable company by far, sporting savvy management and carrying a more sustainable debt load than competitors. The company is also better able to produce free cash flow, as evidenced by its recent financial report. Staples is putting that cash to good use, having just paid a quarterly dividend of $0.11 per share, a 10% increase from the last payout. The company has also been buying back stock.

Foolish take
A little bit of research goes a long way, and it looks to me that the positive indicators for Staples far outweigh the slower-than-anticipated growth that appears to have caused investors to punish the stock after its last numbers report. Sharp-eyed investors know a deal when they see one, however, and I anticipate that those who see the value here will be very proud of themselves a little bit further down the road.

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At the time thisarticle was published Fool contributor Amanda Alix owns no shares in the companies mentioned above. The Motley Fool owns shares of Staples and Motley Fool newsletter services have recommended buying shares of and Staples. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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