Why These Office Supply Stocks Surged Today
While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Office Depot and OfficeMax both climbed about 7% today after Janney Capital Markets upgraded the pair of office retailers from neutral to buy.
So what: Along with the upgrades, analyst David Strasser boosted his fair value estimate on Office Depot from $4 to $8 and for OfficeMax from $13 to $21.50. The two companies have performed sluggishly since agreeing in February to a $1.2 billion merger -- which is expected to close by year-end -- but Strasser believes that the weakness provides an attractive entry point given the deal's significant savings potential.
Now what: According to Janney, the incremental costs from the merger will be small relative to the juicy upside. "We believe the company's estimate of $400-600 million in synergies is reasonable, and incremental opportunities from store consolidation, which are not included in these estimates, provides somewhere between a cushion and upside to these estimates," noted Janney. "We anticipate store closure synergies to be about $125 million based on our analysis of 300 overlapping stores within 2 miles of each other in key markets." But while the combined company is definitely set up for some solid savings, increasingly intense competitive pressure -- from both brick-and-mortar behemoths and online disruptors -- makes the long-term story far more uncertain.
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Fool contributor Brian Pacampara has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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