Tuesday, November 4, 2008
(Cont'd from above)...

But, if you want to make money, you need to recognize that good things in the stock market do not come in small packages... and that's exactly what OMX and ODP are... small packages.

If you want to invest in an office supply name, instead of rank speculation, which is what ODP and OMX are... you want best of breed, and that is, without a doubt, Staples Inc. (SPLS)...

SPLS may not be an under-$10 lottery ticket like the other two, and it also had a nice run already... 43%... So, I don't know, since last week, from $13.67 to $19.49... it's had half the move, though, of those other two stocks, but it's more than twice the company they are. Oh, and oh contrare to popular belief, I do not think that (Treasury Secretary) Hank Paulson will allow office supply stores to get federal investments... although that would probably be one of the few areas that won't get them.

Now, if you want to speculate like a pro here, instead of an amateur, SPLS is the only viable choice on every key metric... It beats OMX and ODP - two stocks that have already had their moves... SPLS, I see not just going not just higher but, over multiple years, going much higher.


Here's what I don't want you to see when you look at these companies.... I don't want you to see OMX as a company with a $6 stock... trading at nearly 5x earnings and a $500 million market cap... because the company has $1.8 billion in debt, so it would cost and require $2.2 billion to take OMX over. You always have to take the debt into account when you're looking at these under-$10 names. Do not see ODP as a company with $880 million market cap, and a stock that trades at just 10x earnings... See it as a company with over $900 million in debt, and you have a "cost and require" of $1.55 billion to buy.

Why does this matter?...

Because any longer-term upside in these two stocks would have to come from being taken over. Since SPLS isn't in a position to buy anyone right now and, in the past, has failed to get government approval to buy ODP, you cannot count on a takeover. And you also have to recognize that, to another company, both ODP and OMX do not look like cheap takeover targets, because of their debt.

SPLS... That's the one that's investible... even though SPLS, with 1,800 stores is already the largest... it has the greatest ability to expand... it plans to open 110 stores by the end of the year, and now it's opened 75 stores in 2009... that's down a little bit from the 100 projection...

Plus, SPLS is like BBY, which is reacting positively to the CC closures. The hobbled competition makes BBY looks good. I believe it will soon make SPLS look good.

ODP is the second-largest, with 1,272 stores. They had initially planned to open 45 stores next year, but now they're planning to open even fewer. ODP has a little more than two-thirds as many stores as SPLS does, but next year, it's opening fewer than two-thirds as many new stores.

Finally, OMX has 999 stores. They're planning to open another 40.

SPLS has the size and the better growth. That's not something you see everyday. But it goes straight to my point... size matters... at least when it comes to the stock market...

It also tells you just how much better SPLS is than the other two companies. How is it possible to have the most stores and the greatest store growth?... Because, while OMX and ODP only use one store model, SPLS has four different formats for stores... a gigantic 20,000 square foot template, a 4,000 square foot copy... a print shop model... That means SPLS has the right size for rural, urban and suburban areas... The other two are still trying to figure out that one-size-fits-all stuff.

SPLS and ODP each have about 400 stores outside the U.S., while OMX only has international operations through a Mexican joint venture. SPLS has the edge here too, because Corporate Express, the company it bought, will help kick its international growth into gear, and we want international growth.

Operating margins?... SPLS has wiped the floor with OMX and ODP for the past four quarters, although the weak economy has hurt its profitability. SPLS still managed to post 4.8% margins in the second quarter, compared to 3.7% for ODP and 1.7% for OMX.

I'm giving all this, because OMX and ODP look cheaper, but they're not...

On same-store sales, SPLS has been the leader the last two quarters, seeing declines of 7% and 8%, compared to 10% and 12% for OMX, and 10% and 14% (respectively) for ODP...

SPLS may trade at 12.7x next year's earnings... that's a premium to OMX's P/E multiple of 5, and ODP's P/E multiple of 12.6... but it's a better company. It's best of breed... And, unlike ODP and OMX, I trust the estimates for SPLS. The other two need to be bought (acquired) to go much higher.

SPLS has the organic growth and the smart acquisition of Corporate Express to drive it higher. You will be hearing "that was hard" for OMX and ODP to keep going higher... but you'll be hearing, "That was easy!" (i.e., Staples' slogan) for SPLS to be propelled higher.

Here's the bottom line...

The Bottom Line!:     Speculate all you want with Office Depot, Inc. (ODP) and OfficeMax Inc. (OMX). They look cheap, but cheapness is only skin deep. Look at the fundamentals and you'll see that  Staples Inc. (SPLS) is the only investable office supply store. It beats OMX and ODP - two stocks that have already had their moves... SPLS, I see not just going not just higher but, over multiple years, going much higher.

[verbatim recap]

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