Reasons to Bet On Staples Ahead of Third-Quarter Earnings

Staples stock offers more value than risk, especially with its 12-cent quarterly dividend that yields almost 4% annually.
By Richard Saintvilus ,

Staples (SPLS) , the largest retailer of office products and services in the U.S., will report third-quarter earnings results before the opening bell Wednesday. With Staples stock down more than 30% in 2015, including a 23% decline in the last six months, the Framingham, Mass.-based company is a strong turnaround candidate in the next 12 to 18 months, regardless of what Wednesday's results might reveal.

For the quarter that ended in October, analysts on average expect earnings to be 35 cents a share on revenue of $5.67 billion, translating to year-over-year declines of 5.4% and 5%, respectively. For the full year, ending in January, earnings are projected to decline 4% year over year to 92 cents a share, while revenue of $21.3 billion would show a year-over-year decline of 5.3%.

Sure, revenue and profits have been hard to come by for Staples, especially in a retail sector lead by Amazon's (AMZN) - Get Report dominant e-commerce platform. But with Staples' pending merger with rival Office Depot (ODP) - Get Reportbecoming more of a reality, there are reasons to expect Staples will deliver better results in quarters and years ahead. And while improvement won't happen overnight, investors who are willing to be patient stand to realize substantial gains, based on the stock's average analyst 12-month price target of $19, which is nearly $7 higher than current levels of around $12.50.

Based on fiscal 2017 consensus earnings estimates of 96 cents a share, Staples is projected to return to earnings growth in 2017. You would be correct to point out 96 cents a share in 2017 would put the company on flat growth compared to 2014, but it would show better than 4% growth above 2015 projections. And fiscal 2017 doesn't yet factor in the cost savings and merger synergies Staples might realize in combining with Office Depot.

The merged company would have an improved competitive position. A combined Staples/Office Depot could face off against online retailer Amazon and big-box competitor Walmart (WMT) - Get Report .

Given these factors, now would be the time to own Staples shares, which are priced at just 13 times fiscal 2017 estimates of 96 cents a share, compared with a forward price-to-earnings estimate of 17 for the average company in the S&P 500 (SPX) index.

From my vantage point, there's considerably more value in Staples shares today than there are risks, especially when you consider its 12-cent quarterly dividend that yields almost 4% annually -- twice the average yield paid out by the average S&P 500 stock.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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