Staples Is a Screaming Buy After Office Depot Buyout

SPLS stock may see earnings jump by 60% on ODP deal

Staples, Inc. (NASDAQ:SPLS) finally made good on the rumors that it was shopping for big-box retail rival Office Depot Inc (NASDAQ:ODP) this week.

Staples Inc SPLS stock retail stocksIt also happened to make good on my recent prediction that ODP stock holders would soon see a pop on the buyout, which is an added plus for yours truly.

But now that the news is out, the million dollar question for SPLS stock holders is whether an old-school specialty retailer like Staples can survive even without the competition of old.

After all, investors who bid up Staples stock on the news have abandoned ship just as quickly today, with the stock giving up all of Tuesday’s gains and settling back into the $17 range where it has been for months since the first buyout rumors swirled.

In my book, I think the merger will take time to bear fruit — particularly given that Office Depot hasn’t completely finished digesting its own merger with rival Office Max less than two years ago. But it will ultimately result in a more efficient and more profitable Staples.

E-Commerce Isn’t a Problem

It’s undeniable that Staples faces some serious headwinds in the age of e-commerce and Amazon.com, Inc. (NASDAQ:AMZN). But keep in mind that Staples is now all alone in the brick-and-mortar office supply game — and more importantly, it’s also an e-commerce powerhouse in its own right.

As of last year’s e-commerce rankings by Internet Retailer, Staples was a firm #3 in the online game with more than $10 billion in sales. That puts it behind only Amazon and Apple Inc. (NASDAQ:AAPL) — and considering Apple isn’t really a peer (selling media and apps) and that Amazon.com sells everything from flat screen TVs to apparel in addition to the same gear Staples does, one could argue AMZN’s competitive edge is overstated.

Staples Has Brick-and-Mortar Advantage

Say what you want about big-box stores being an anachronism, but the ability of Staples to marry online sales with next-day delivery from brick-and-mortar locations is not dissimilar to Amazon’s warehousing model. Sure, there’s a bit more overhead than a warehouse in rural Kentucky, but there’s also potential to be a point of sales, too.

In fact, Amazon is now pushing into physical retail to expand its reach — proving that a one-two punch of e-commerce with real retail sites is not actually an anachronism at all.

SPLS Stock to Soar on Cost Cutting

Thanks to efficiencies from its own merger with OfficeMax, Office Depot managed to stop persistent losses and return to profitability on its own. Once you roll those operations into Staples and gain even more efficiencies of scale, it will be a big boon to SPLS stock and margins.

In fact, one report estimates that Staples could see earnings soar by 60% in the next year on this deal, in part because of a modest increase in scale, but largely thanks to better margins and cost cutting.

SPLS Stock a Good Value

Even after a pop of some 50% in the last six months on all this buyout chatter, Staples stock still manages to trade at a forward price-to-earnings ratio of about 17.5 — in line with the S&P 500 index, and actually cheaper than some retailers; Home Depot Inc. (NYSE:HD) has a forward P/E of about 20, and big-box giant Costco Wholesale Corporation (NASDAQ:COST) has an earnings multiple of about 27 based on next year’s forecast.

When you add it all up, it’s hard to imagine that Staples won’t at least tread water thanks to gobbling up its competition.

And considering the lack of attractive options in a volatile stock market, you could do worse than bank on SPLS stock rising thanks to cost cutting in the year ahead.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/spls-stock-office-depot-buyout/.

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