touched a 52-week low Wednesday, as the company was downgraded from neutral to underweight by the brokerage JPMorgan. At Wednesday's closing price of $21.45, the stock is now down almost 19% year to date.
Staples is the largest office-supplies retail chain in the country, and has more than 1,900 locations worldwide. In that respect, the company has its finger on the pulse of the U.S. economy just as much as larger retailers
, which both lowered guidance earlier this week.
With that in mind, I'm here to answer readers' questions: Should you buy shares in Staples? Is the company oversold at current levels, or is it too soon to step in and buy stock in this retailer?
The company posted fiscal second-quarter (ended July) results Aug. 21 that matched analyst expectations on both the top and bottom lines. Staples earned 25 cents a share, while revenue grew 10.6% year over year to $4.29 billion.
But the overall sales growth was only possible because of new store openings, as management also guided to flat to lower sales in North America the second half of the year on a comparable store basis.
While the company said that declining home sales and higher interest rates impacted consumer confidence, I believe that Staples' recent troubles remain firmly entrenched in domestic corporate spending. August showed the first monthly decline in nonfarm payrolls in four years, and I expect this trend will continue through the end of the year, led by job cuts in the financial services industry.
At current levels, Staples is valued at just 15.1 times expected fiscal 2008 (ending January) earnings of $1.42 a share. This is at the low end of the company's historical average valuation, though still a premium to the 10.6 times and 14.3 times earnings
multiples that competitors
Staples management, for one, apparently sees value in its own shares, announcing a $1.5 billion (70 million-share) buyback program in June. The stock was trading some 3 points higher then, but the company will likely not update investors on any repurchases until it reports fiscal third-quarter (ending October) results later this fall.Despite the buybacks, management said in its 10-K
Securities and Exchange Commission
filing at the beginning of the year that it was committed to spending $550 million on capital expenditures this year, including opening 100 new stores.
Given the current economic outlook, and the fact that recent interest rate cuts will likely take a couple of quarters to have any positive effect on the economy, I'd want to see management focus on cutting back on its store base and spending more to buy back the stock while demand is declining.
With that in mind, I believe it's too early to buy Staples at current levels. The company will likely struggle to meet consensus earnings estimates over the coming quarters, and I'd wait for the stock to fall into the high-teens before I'd consider purchasing it.
As originally published, this story contained an error. Please see
Corrections and Clarifications.
David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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