Is Office Depot Destined for Greatness?
Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Office Depot fit the bill? Let's look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Office Depot's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's look at Office Depot's key statistics:
Revenue growth > 30%
Improving profit margin
Free cash flow growth > Net income growth
(543.6%) vs. 1,457.2%
Stock growth (+ 15%) < EPS growth
18.1% vs. 132%
Improving return on equity
Declining debt to equity
How we got here and where we're going
We looked at Office Depot last year, and it's earned more passing grade in its second assessment to finish with five out of seven possible passing grades for 2013. Although the company's bottom line has been able to climb into positive territory, Office Depot's free cash flow continued to fall in recent quarters, which could be a warning sign if not reversed soon. Let's dig a little deeper to find out what Office Depot -- newly merged with OfficeMax -- will be able to do in 2014 to improve its score further.
Office Depot's latest quarterly results disappointed on both top and bottom lines amid weakening demand for the traditional office products. Over the past few years, technological developments and an increased shift to cloud-based recordkeeping have combined with the powerful rise of online retailers, damaging office supply specialists that did not master the shift to online sales. This sector weakness pushed Office Depot and OfficeMax into each other's' arms, and that merger was completed a month ago after the Federal Trade Commission cleared the $976 million all-stock transaction. Subsequently, Bank of Americaupgraded Office Depot from "underperform" to "buy" in expectation of greater synergies between the second- and third-place office supply chains.
Fool contributor Michael Lewis notes that the merger will provide significant streamlining benefits for the newly augmented Office Depot, which now expects to save $400 to $600 million over the next three years as a result of operational synergy. This larger Office Depot is expected to produce combined revenues of around $17 billion, which could come close to challenging the dominance of brick-and-mortar peer Staples , which recorded $23.8 billion in revenue for the trailing 12 months. This merger-driven revenue boost would also be enough to push Office Depot's score up by one more point without effort when we look at it again in 2014. However, Amazon.com recorded $70 billion in revenue for its trailing 12 months, and its dominance on the e-commerce marketplace has allowed it to introduce loss leaders as it feels necessary to undermine Staples and Office Depot. Staples was the second-largest online retailer in America in 2011 , but its online sales growth rate lagged far behind that of other top performers.
On the other hand, Staples has been adding new categories to its product portfolio while trying to bolster its e-commerce presence. The company recently acquired e-commerce personalization technology start-up Runa, which could help it to boost customer engagement and sales. Staples has also revamped its website, which is around 40% faster than the old version, to improve customers' online shopping experience. Fool contributor Daniel James notes that Staples has unveiled a new price-matching policy, which could pose substantial threats to Office Depot's far less-developed online presence. Staples may also have opportunities to capitalize on the disruption caused by the Office Depot merger. The larger Office Depot will be shuttering some of its less-productive stores to remove excess capacity and achieve cost savings.
Putting the pieces together
Today, Office Depot has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
The future of retail
Office Depot's future is far from certain, but some retailers are still producing fantastic long-term results. To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.
The article Is Office Depot Destined for Greatness? originally appeared on Fool.com.Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Bank of America and owns shares of Amazon.com, Bank of America, and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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