Why Staples Is A Strong Buy In 2015

A) Introduction

On Tuesday, a FT report came out saying that Staples (NASDAQ:SPLS) was likely to reject calls from activist Starboard Value to merge with competitor Office Depot (NASDAQ:ODP), sending the stock down nearly 6%. Whether you believe Staples will give into the activists or not, we believe that Staples offers an attractive valuation and price momentum. We will begin by taking a quantitative look at how Staples stacks up in a variety of different valuation and growth metrics, before providing qualitative analysis on the activist situation.

We should note that we take a quantitative approach to investing, preferring to focus our analysis on a certain set of metrics that have a strong predictive ability. Thus, we tend to analyze academic papers and perform historical back tests on different metrics before including them in our analysis. We will provide links to the academic papers we draw inspiration from as we progress through our breakdown of the stock so investors can see for themselves what we base our conclusions on. Investors looking to learn more about our analytical style can do so here.

B) Valuation Breakdown

We'll start by analyzing Staples value profile. This is important to look at as "Value stocks (with low ratios of price to book value) have higher average returns than growth stocks (high price-to-book ratios)". Staples valuation profile is shown below:

Source

There are a few important things to note from this table. First off, Staples finishes in the top 40% of the entire market in every valuation metric shown above. Of these, Staples is most undervalued on a revenue basis with its sales yield of 213% being way below the Specialty retail (95%) and consumer discretionary sector average (55%). The company looks fairly attractive on a earnings and dividend basis, with its earnings yield of 5.65% and dividend yield of 2.89% both much higher than the specialty retail averages (3.24% & 1.62%). Staples also looks attractive on a book value (P/B ratio of 1.77 vs. group average of 3.93) and free cash flow basis (price/FCF of 23 vs. group average of 53). As shown in the link above, value stocks tend to produce significant excess returns, which bodes well for Staples in 2015. Overall, the stock is strongly undervalued relative to its group peers and we expect the stock to generate 7.24% of outperformance due to this undervaluation.

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Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SPLS over the next 72 hours. The author wrote this article themselves, and it expresses their ...

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