24/7 Wall St.

Next Tuesday we have earnings from Staples, Inc. (NASDAQ:SPLS) and First Call has EPS at $0.25 and revenues at $4.3 Billion.  The following quarter is expected to have $0.41 EPS on $5.2 Billion in revenues.

Here is the hardest part to guage in Staples shares: it has been acting like a little pig.  It didn’t rally all that much with the broad market at all this year and for the most part it gave up just as much as the market in the last drop.  Shares closed down $0.02 on a strong market day at $23.25, and its 52-week trading range $22.25 to $28.00.  In fact, Staples has been dead money for most of the time since the end of 2004 to early-2005.  Options traders are only putting what looks to be a $0.70 max stock price move in either direction, although we’ll revisit this since today was expiration.

Fundamental analysts are still positive on the office supply retailer, and the average target appears to be $29.00 or higher.  If you interpolate the 2007 EPS estimate (actually fiscal JAN-2008) of $1.44, then the forward multiple of earnings is only 16.15. If you use the $1.67 EPS target for fiscal JAN-2009 then you only get an 18-month forward earnings multiple of 13.9, and that is representative of almost 16% EPS growth.  If I was trying to tell you what the tea leaves were saying I’d have to conclude that there is a huge belief that a slowing economy is going to really hit it and that its earnings aren’t going to hit target.  But our crystal ball is in the shop and I can’t say that with knowledge besides a guess. 

The thing is that Staples is a good store for office supplies.  It’s not so great at electronics and the like that would bring in more electronics buying from business people or individuals, but how often do you see people getting fired up to go there for that?  Maybe the rest of the country is becoming like me in that printing is at an all-time low and outgoing snail mail physical use of products is lower and lower. When I took this picture of the front of the store the other night in NYC, it sure looked like things were brighter than the stock.

Jon C. Ogg
August 17, 2007

Jon Ogg can be reached at [email protected]; he produces the 24/7 Wall St. Special Situation Investing Newsletter and he does not own securities in the companies he covers.