Tags: Mastercard (MA); Amex (AXP); Office Depot (ODP); Office Max (OMX); Staples (SPLS)
11am ET…January 29, 2008 — Comment on Markets, Companies and Events in the News
Working at Home
A relatively obscure trade magazine reported that 28 million people now work at home, at least part-time. With non-farm payrolls at 138 million people, this means 20% of the country works from home, or one-out-of-five. That’s pretty remarkable. Even more remarkable is that this work-at-home figure is 40% greater than it was in 2002.
While the wizards of Washington continue to debate if we are in a recession, we see plenty of evidence pointing to a slow-down in the economy. The week before last, American Express (AXP: $47.40) reported a pronounced slowdown in spending among its 84 million card members, and a slower pay down of credit balances.
MasterCard (MA: $189.00) seems sure to follow. A graph (below) comparing Amex and Mastercard for the past 5-days indicates that the traditional premium between these two stocks has already disappeared, compelling us to repeat a short sale opportunity in MasterCard. A slowing economy also means that more people can be expected to work from home — either due to layoffs or efforts to supplement income.
The three major public companies servicing in this sector of the economy are
• Office Depot (ODP: $13.76),
• Office Max (OMX: $22.63) and
• Staples (SPLS: $23.33).
These three public companies collectively represent less than 15% of the total office supply industry — consequently, there is plenty of room for consolidation within this highly fragmented industry. These are three companies that can be expected to lead that consolidation. This point-of-view has been the market play in these stocks from the start. Note that institutions own, respectively, 89%, 98% and 86% of these stocks. However, based on the comparative graph below, it looks like Staples, clearly the industry leader, has become more generously priced in relation to Office Depot and Office Max.
Research looked a little closer at the numbers —
Staples position as the industry leader is irrefutable. However, Office Depot appears to be a better value —
1. ODP’s sales are 20% less than Staples, though gross margins are the same; this spells out an overhead issue; Steve Odland, the new CEO who came on board in 2005 after successfully heading up Autozone is perfect for this challenge.
2. A P/E of 8 times earnings for ODP versus, a multiple of 17 for Staples, is overkill to the downside. If the slowing economy does begin boosting sales forecasts and consolidation increases market share, even the slightest P/E expansion will propel the stock price.
3. Perhaps the most diminished of all is ODP’s market value to Sales…at less than 30%. Even a 0.5 ratio (50% of $15.5 billion in sales) equals a $28 stock price (50% x $15.5 B = $7.750 divided by 273 million shares issued = $28 / share)
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