No. of Recommendations: 18
The final Mr. Goodbuy screens were posted on Sunday, May 20, 2012. Staples (SPLS) headed up Table 8 and appeared in 4 other tables.

T S B Pr B S Pr
Y i Q a e oj e t R BM M* oj
r m P f t Fin 3-5 a e M Wm Fair TR TR TR TR TR 3-5
Tick s e Z e a Str Yld r w S RF RF 4 13 26 52 YTD TR

SPLS+ 21 2 99 2 1.05 95 1.5 6 - -2.35 2.62 1.91 -4.5 2.4 4.3 -25.1 8.4 29

On the preceding Friday (May 18th.) Staples closed at $13.07. Just over three months later the share price is about $11.00, close to its 52 week low.

Based on a conservative share price of $13.00, we can extrapolate from column 13 (M* Fair RF) that Morningstar estimates Staples' fair value at approximately $24.83 ($13 x 1.91). This would likely make Staples a five star stock in their eyes; that is, SPLS's stock is in a "consider buying" range. Three months later and MS has its rating "under review,"

Here is their take on the company from the page linked above:

Staples need not fear losing its number-one status among the office products distributors. In fact, we assert that the firm can extend its already market-leading position. While office supplies are an intensely competitive industry, we continue to believe that the firm's scale, distribution efficiencies, and ability to broaden the scope of its business through service offerings will provide ample revenue growth and margin expansion opportunities. In our view, Staples may have an emerging economic moat given improved distribution efficiencies and bargaining power over suppliers.

For those who favor Mike Klein's BMW method screens, Staples has a RMS of –2.61 and a Return Factor of 2.97, as per its 20 year chart. The (potential) BMWM Return Factor is higher now than it was in May. There's no doubt; this chart illustrates it clearly, Staples' stock price has taken a substantial hit over the past few years. When, or whether, it will reach its average CAGR again is something the chart can't tell you; that's for the future.

According to Magic Diligence's calculator SPLS's Earnings Yield is 19.0%.
— (Operating Earnings - Minority Interest) ÷ Enterprise Value.

And, SPLS's Tangible Return on Capital is 37.7%.
— Operating Earnings ÷ Tangible Invested Capital.

Anyway you choose to calculate the efficiency and value of the company, it's, more or less, the same story. For instance, the company's earnings yield is 12.45% —calculated traditionally as net earnings ÷ stock price (the P/E ratio inverted). Returns on tangible capital (after backing out goodwill and intangibles) clocks in at around 37% (net earnings ÷ tangible capital), almost identical to Magic Diligence's somewhat fancier calculation.

Based on these calculations SPLS appears to be a very cheap stock of a company that efficiently invests capital. It's priced like a low return-on-capital utility stock that is only likely to grow earnings at the rate of inflation, or less, about 1%-3%. Anecdotally, and, ironically, a recent "flight to safety" has resulted in many utility stocks being bid up as if they are likely to grow earning in the mid-to-high single digits, in all probability, they're not. Whether Staples will again in the future remains to be seen.

SPLS efficiently invests capital: that is, it gets a good return on tangible assets. But, how well did it invested the capital it spent on acquisitions, booked now as goodwill on the balance sheet? Timing, as the saying goes, is everything. Staples invested heavily in Europe at the wrong time, just before their great recession. Needless to say, that investment, if not disastrous—time will tell—has been disappointing and a drag on earnings, financial health, and probably the stock price. The company seems to have already written off a little of the goodwill related to its European acquisition. Ouch.

I've gone back and forth on Staples since '07. Optimistic. Pessimistic. What about now: value or value-trap? From one perspective it deserves its present valuation. Earnings have grown from $1.28 a share in 2006 to $1.37 last year. That's only just over 1% a year earnings growth for the five years since the end of '06. Ouch again. But, on the other hand, looking at recent earnings per share, they've grown at 11% for the last two consecutive years, however, it seems that this recent trend has come to an abrupt halt.

Big box stores. So twentieth century. Such a bad idea as an investment scenario in the twenty-first. The urban landscape is littered with the skeletal remains of these dinosaurs. If it wasn't for Staples successful foray into online retailing I wouldn't give Staples' stock a second glance at this juncture. However, to my surprise, Staples is now (apparently) the second largest online retailer in the world, after Amazon. "North American delivery is up 2% from the previous period, revealing firm sales growth in the internet business, as it shifts to online mediums in order to increase product availability." —Value Line.

On the subject of Value Line, The Mr. Goodbuy table shows VL Timeliness and Safety rankings of 2 (columns 3 & 5). Since May Value Line has scaled back SPLS's Timeliness ranking to 5 (lowest), after the latest disappointing results. Financial Strength and Safety rankings remain the same. Value Line is, however, sanguine about Staples' prospects, predicting a share price of between $35 and $45 for 2015-17. This is based on a more historically average P/E for the company of 17. They predict an annual earnings growth rate of 10.5% and 8.5% for the dividend. Even if they are half right the share price should advance quite satisfactorily.

Profit margins took a hit along with earnings in '08 and they are essentially still at '08 levels. Their net profit margin is presently around 4%. However, net margins have slowly been climbing out of the hole, along with earnings, over the last three years, rising from 3.3% in '09 to 3.9% last year. This trend might be stopping in its tracks though. This is a snip of what Value Line had to opine on Staples' latest snafu:

[…]Sales declined 6% from the prior-year period, to $5.498 billion and came in well below our estimate of $5.850 billion. Management cited slower-than-expected sales in North America and continued weakness in Europe and Australia for the short-fall. Too, the operating margin narrowed in the latest term, due to falling sales, as well as deleveraging of fixed expenses and lower product margins. Share net of $0.22 missed our forecast by a penny but matched the year-earlier figure.

[…]We have revised our top-and-bottom-line estimates accordingly, down from $25.4 billion and $1.50 a share, respectively, to $25.0 billion and $1.45.

The dividend yield is around 4%, much higher than average—for the stock and for the market generally—in spite of which the pay-out ratio is relatively modest at around 29% of net earnings. SPLS's usually generates good free cash-flow which often bests earnings, so there's little reason to think that the dividend, or modest dividend growth, is in jeopardy, at least for now.

All through the "Great Recession" retained earnings continued to grow. Although the company issued some new shares to help finance its European adventure, for the last two years they have been buying shares back. Likewise, they've been whittling down long-term debt. It makes you wonder why a company with so many positive trends had its stock slammed so hard over the last year, until their latest earnings miss that is.

Given the recent flight-to-safety to "can't miss" dividend paying stocks, Staples has been left behind in the "can miss" pile. However, for those seeking income the dividend looks relatively safe. The stock is modestly valued, and, given a broad economic recovery down the road it's unlikely that the stock's price will continue to languish. While investors wait for that recovery Staples' dividend provides some solace.

Of course, the crux of the matter—the million dollar question—is not when will Staples recover, but will Staples recover—what are the odds? Their direct competition doesn't seem to be too much of a worry, though Amazon might be. Wal-Mart and Target sell a small selection of basic office supply items and usually at a lower price point. It seems to me to recover and prosper they have to keep, renew, and gain corporate accounts; that coupled with a recovering economy and employment rate. Perhaps no small order, but not beyond possibility surely. Companies can order online from Amazon, etc., but they won't get the attention and service that Staples has to offer. Is this an issue? I don't know.

The world is changing so fast. This is the vortex that Staples is, to an extent, being tossed about in. Take their name for instance: Staples. It's not inconceivable to imagine a child saying: "Mommy, what's a staple?" and after the explanation: "Why would anyone want to attach one piece of paper to another?" Why indeed…

Any, and all, thoughts are welcome.

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No. of Recommendations: 0
Kelbon, thanks for another interesting and thoughtful post.

I've always liked Staples just as I once liked Circuit City.
To me, the most insightful idea in your post is "The world is
changing so fast". Staples will likely survive, but I believe,
as you touched on, that competition from Amazon and other internet suppliers will continue to impact their growth and income and the
better times are behind them.

Staples' world is a changing and it's a powerful force. There
must be better places to invest.

rp - who has seen a lot of changes
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No. of Recommendations: 2
Kelbon, I stand by my reply to your previous post on Staples last year:

The office is changing. Offices are using less paper, less file cabinets, less folders, less staples, less paper clips, less guest chairs. They are using more email and less paper letters. Ever larger and cheaper hard drives are used to store data. The hard drive is replacing the file cabinet. Corporate use of the internet and intranets is growing. People telework more and video conference more. All of this will hurt the office supply business.
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For years pundits complained that the promise of the paperless office was an empty one. Is it finally happening? I know I hardly use my printer anymore. I no longer get paper statements from my credit card and I pay it via Internet, not by check in the mail. My contact with the companies I invest in is mostly via Internet as well, no more paper 10-Ks, 10-Qs, and proxy statements. I hardly write checks any more, the debit card is more convenient.

I still prefer paper books! ;)

My first hard disk drive, a Profile for the Apple ///, about the size of a shoe box and with the amazing capacity of five megabytes probably cost over $200 1984 dollars. My latest 4 gigabyte USB flash drive cost me less than $15 2012 dollars. That's four orders of magnitude price/performance drop or price/capacity increase.

That flash drive could, in theory, hold over a million text pages, more that 2000 500 page books. My library which takes up a wall in my home office contains 400 to 500 books. I still have the box of staples I took with me when I closed my office around 1990.

Denny Schlesinger
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No. of Recommendations: 1
Great post, kelbon!

I haven't really looked at Staples, but I recognize thoughtful analysis when I see it.

Thanks for sharing.

Home Fool
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I curious for your opinions for when to get into Staples with its 4% dividend and robust business metrics as well as ranked #2 for on-line sales giant

as a BMW neophyte, is it better to buy and get the 4% dividend with the outlook that Staples will thrive and be a long term winner

or look at other undervalued stocks with a 2 RMS that appear to have a shorter horizon for gaining valuation

thank you for your thoughts 1
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as a BMW neophyte, is it better to buy and get the 4% dividend with the outlook that Staples will thrive and be a long term winner


The BMW Method is about price movements, the dividend is just gravy.

or look at other undervalued stocks with a 2 RMS that appear to have a shorter horizon for gaining valuation

People focus on RMS but back testing by Mike Klein, of Klein Chart fame, has shown that RF is a better indicator of future performance.

But in any case, you should not buy the stock for the dividend, for the RMS or for the RF. Buy only if you are convinced that the stock has been unfairly oversold and that there are good reasons to believe it will bounce back. That requires researching the company thoroughly.

What would make Stales bounce back?? When I look at the price chart I get little hope:

Just reading the chart, the drop in 1999-2000 is rather sharp and probably the SPLS bubble bursting. But the decline 2006 onward looks like a tired stock, long term holders losing faith in the stock. This is not the kind of drop that is likely to have a fast reaction. It is not enough to know what the charts says. You have to know why the chart is saying whatever it is saying. Does the chart resonate with real world data? It does. Management expanded to Europe at the wrong time!

Welcome to the exciting world of BMWM! ;)

Denny Schlesinger
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BTW, on the current chart the 2000 drop as shows at around -0.5 RMS but a chart drawn back then, without the later data, would show a much more negative RMS and a higher RF. Indeed, the trip from 7 to 25 was better than a triple in five years!

Denny Schlesinger
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No. of Recommendations: 1
I bought a little 5 months ago and am considering buying more as it has fallen to an even more attractive level.

I use Staples occasionally as there is one near my home. It is never that crowded and I don't see a lot of cash going through this store. I don't drop much money when I use there services, and buy stuff from them very frugally. So from a pure Peter Lynch walk through the mall, it is not a "back up the truck" buy.

That said, there business is growing nicely and there metrics are impressive to me (especially Yld, M*RF, RMS, and acceptable debt).

Not sure, but I think I am going to add.
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Better not adding more to a failing business model.

Take the loss, get something back from the IRS, and buy something better.
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