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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