admin 17 March 2009 Featured No Comment

“I’ve always liked Staples (NASDAQ: SPLS); the company has traditionally put up good numbers, and the stock price has been rewarding for investors over the years,” says Chuck Carlson. The editor of the blue chip advisory, The DRIP Investor, adds, “More recently, however, the stock of the office-supply chain has gotten hammered by a variety of issues.” Here’s his review.

“First, the economic slowdown is impacting businesses, especially the company’s small-business customers.

“In addition, the 2008 acquisition of Corporate Express, a Dutch company that is one of the world’s leading suppliers of office products to businesses and institutions. This increased the company’s debt levels substantially at a time when Wall Street is especially nervous about corporate debt levels.

“The stock is down 40% from its 52-week high of $26.57. And that is an important point to consider. Yes, the environment for retailers is lousy. Yes, it’s tough to see any near-term improvement.

“And, yes, debt is evil right now. But the stock is already discounting to a large degree those negatives. The stock’s current price level is attractive enough to warrant some nibbling.

“Staples is the world’s largest office products company. With $27 billion in sales, Staples serves customers in 27 countries. The economic environment has been challenging for all retailers, including Staples. While earnings are likely to be pressured in the near term, there is cause for optimism over the long term.

“For starters, a lot of Staples’ competitors are shuttering stores. Thus, the firm should be able to expand its market share as economic conditions improve. Also, the addition of Corporate Express gives the firm a much bigger footprint internationally.

“To be sure, the acquisition added significantly to the company’s debt load. At the beginning of November, the firm had long-term debt and other long-term obligations of nearly $2 billion.

“The good news is that Staples generates lots of cash fl ow (more than $1.1 billion through the first three quarters of the fi scal year), which should help in reducing its debt load over time.

“Staples is a classic case of a strong retailer that is down with the group but likely to bounce back strongly as its markets recover and market-share gains emerge. While there is a risk of buying early in these shares, patient investors looking over the next 12 to 24 months should be rewarded for purchases in the mid-to-low teens.

“DRIP investors note that Staples offers a direct-purchase plan whereby any investor may buy initial shares directly from the company. Also, the company pays a dividend once a year, usually in the March/April time frame.”