Word recently got out that activist investor Starboard Value is pushing for a merger between Office Depot Inc (ODP) and Staples, Inc. (SPLS). Soon after the news broke, Office Depot’s stock surged 12%. Does this signal a turnaround for struggling ODP stock?
Office Depot – Company Overview
Office Depot is a specialty retail company that provides office products and services. Last year, Office Depot bought rival OfficeMax for $976 million.
Office Depot has 64,000 full-time employees and operates 2,200 retail stores in 57 countries. Last year, ODP stock brought in over $11 billion in sales.
Office Depot – Earnings Buzz
For the third quarter, Office Depot reported earnings of 10 cents per share, beating analysts’ estimates of 9 cents per share. Third-quarter sales jumped 55% year-on-year to $4.07 billion, also beating analysts’ estimates of $4.05 billion.
Looking ahead to the fourth quarter, Office Depot expects upcoming store closures to negatively impact sales, on top of an already challenging market environment. Analysts expect earnings to fall to $0.04 per share and for revenue to decline to $3.92 billion in the fourth quarter.
Office Depot – Current Ratings
After a shaky start to the year, ODP stock remained in “buy” territory for most of 2014. ODP stock slipped to “sell” territory in October, but bounced back to a “buy” rating last month. However, with volatility on the rise, I downgraded Office Depot to a C-rated “hold” this week.
While Office Depot’s buying pressure is solid, earning a solid B grade for its Quantitative Grade, ODP stock’s fundamentals are all over the place. Office Depot excels in sales growth, analyst earning revisions and earnings surprises, receiving A- and B-grades in those metrics.
Where Office Depot struggles is in operating margin growth and earnings growth, failing in both metrics. Cash flow, return on equity and earnings momentum also need to improve earning D-grades. ODP stock earnings a C for its Fundamental Grade.
As of this posting, ODP is a C-rated”hold.” Office Depot is just too volatile to consider a “buy,” and I suggest waiting before entering ODP stock. Perhaps if the Staples merger becomes a reality, we can take a closer look at Office Depot again.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
