How Office Depot Just Became a Huge Buy Rather Than a Huge Sell

Retail

Published: November 14, 2013 11:00 am

Office Depot Inc. (NYSE: ODP) has just completed its OfficeMax merger. It also has a new chief executive to boot. Now the research team at Bank of America Merrill Lynch is not just upgrading the stock. They raised the rating to Buy from a prior Underperform rating, which effectively means that the team is telling you buy rather than sell.

The new price target also went from $3.50 all the way up to $6.50. Based on the $5.38 closing price, the team basically switched the opinion from expected downside of 35% to upside of 21%.

Merrill Lynch’s team is basing the upgrade on 5.4 times the expected 2015 enterprise value over EBITDA. It likes the new CEO on board and believes that cost synergies and savings will follow. They even said, “We believe CEO Ron Smith’s restructuring experience will be viewed positively by investors and increases turnaround credibility.”

Management raised the year-three cost synergies to $500 million to $600 million from a prior range of $400 million to $600 million. Vendor negotiations are also said to be underway to drive higher margins, and the company is in the process of deciding which stores to close due to overlap or low sales.

The team’s investment thesis concludes:

Following several years of disappointing results due to structural headwinds and over-saturation in the office retail market, ODP is in the midst of a multiyear restructuring stemming from the merger with OMX. While we remain negative on the industry as a whole, we believe ODP is in a far stronger position following the merger and believe there are significant opportunities to accelerate earnings through cost synergies, expense reduction and retail consolidation.

We also saw in the report that the return on equity expectations are expected to rise from -0.5% in 2013 to 9.6% in 2014, and then up to 15.0% in 2015. The analysts also gave the following annual earnings per share targets (EPS) with comparable sales targets, and we inferred what the forward earnings multiple (the P/E ratio) would be if the numbers come true:

-$0.02 EPS in 2013 based on a -2.8% comps, implies neg. P/E
$0.32 EPS in 2014 based on -2% comps, implying a 16.8 P/E
$0.54 EPS in 2015 based on flat comps, implying a 10.0 P/E
$0.76 EPS in 2016 based on flat comps, implying a 7.1 P/E

Office Depot shares were up 1.6% at $5.47 after an hour of trading on Thursday, and trading volume was elevated. Its 52-week trading range is $2.72 to $6.10. We would point out that the current consensus price target from Thomson Reuters for the next year is $5.95.

The Average American Is Losing Their Savings Every Day (Sponsor)

If you’re like many Americans and keep your money ‘safe’ in a checking or savings account, think again. The average yield on a savings account is a paltry .4% today, and inflation is much higher. Checking accounts are even worse.

Every day you don’t move to a high-yield savings account that beats inflation, you lose more and more value.

But there is good news. To win qualified customers, some accounts are paying 9-10x this national average. That’s an incredible way to keep your money safe, and get paid at the same time. Our top pick for high yield savings accounts includes other one time cash bonuses, and is FDIC insured.

Click here to see how much more you could be earning on your savings today. It takes just a few minutes and your money could be working for you.