Analysis,

Staples ($SPLS) Analysis Ahead of Q4 Earnings

The parade of quarterly results from the big retailers begins to wind down this week. Next out is Staples ($SPLS), who is set to report its fourth-quarter financial results before the bell on Friday (3/4). Staples ($SPLS) is currently undergoing a potential merger with Office Depot ($ODP), but it has yet be approved by the Federal Trade Commission. Analysts and Investors are currently not very bullish on the upcoming earnings report. Estimated consensus are coming in 10% lower for earnings per share, and 4% lower for revenue in comparison to last quarter.

Wall Street is anticipating Staples ($SPLS) to announce earnings of $ 0.28 per share and revenue of $ 5.42 Billion for the quarter.

What to look for?

In order to get an indication on what we can expect from Staples ($SPLS) on Friday, we look to the potential merger candidate and rival, Office Depot ($ODP). Office Depot ($ODP) announced Q4 earnings last Wednesday that fell short of analyst estimates. Numbers from the report showed that sales were down 10% while margins declined 3.4% for the year of 2015. It is reasonable to believe that Staples ($SPLS) experienced a similar trend, which would cause results to fall in line with analyst estimates.

As with other big or special retailers with stores located overseas, currency fluctuations remain a worry also for Staples ($SPLS). The weakening of the U.S dollar is likely to have caused some headwinds for the company’s most recent quarters financial results. Revenue from international operations declined by 16.8% in Q3, and continued to be a concern for Staples ($SPLS). Investors and analysts will be looking closely for signs of strength or weakness in sales coming from overseas operations as well as future guidance.

Although the company has recently undergone management changes, cut costs, and invested heavily in its online presence, it will most likely take some time before these initiatives start showing results. On another note, it should be mentioned that Shira Goodman, The North American Commercial President at Staples recently purchased over 5, 000 shares. The shares were bought at an average cost of $9.70 per share, with a total value of $49, 470. Insider purchases normally sends positive signals to “the street” and this indicates that Shira Goodman is bullish on the future performance of her company.

Lastly, Staples ($SPLS) also recently declared a quarterly dividend of $ 0.12 per share. This represents a $ 0.48 annualized dividend and a yield of 4.97%. Dividends are important to investors because it is one of the simplest ways for companies to communicate financial well-being. A company’s willingness and ability to pay steady increasing dividends over time provides good clues about its financial fundamentals.

 

Fundamental Analysis

Let’s take a look at how Staples’ ($SPLS) financial ratios compare against the other major players in the big and specialty retail sector. We populated the SprinkleBit analyzer with, Office Depot ($ODP), Candela’s Incorporated ($CAB), MarineMax Inc ($$HZO), and Ingram Micro Inc ($IM). For this analysis, we used EBITDA multiples, revenue multiples, market cap to revenue, market cap to total assets, and PE to measures Staples ($SPLS) against it peers.

By running the fundamental measures in comparison to the peers, we received an implied share price of $ 14.18. With the current trading price of $ 9.71 (EOD 3/2), Staples ($SPLS) is undervalued by 46.09%.

 

Screen Shot 2016-03-02 at 1.59.26 PM

 

One thing we noticed during this analysis was that both Staples ($SPLS) and Office Depot ($ODP) have uncommonly high PE ratios. They currently have a PE ratio of 191 and 361 respectively. This is severely higher than industry average of 44.2. In comparison, the companies on the S&P 500 have an average PE ratio of 18.1. This could be a concern for investors going forward.

 

Screen Shot 2016-03-02 at 2.09.59 PM

Technical Analysis

We have also analyzed the technicals on the daily chart in order to see where the stock price could potentially move to.

With an entry price of $9.70 and a reported loss on earnings, the stock has the potential to fall to $ 9.20 for a 5.15% loss.

With an entry price of $9.70 and a reported beat on earnings, the stock has the potential to rise to $ 10.05 for a 3.61% gain.

The risk/reward ratio for this trade is 0.7.

 

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I am a swing/momentum stock and options trader, and trade mostly tech and consumer trend stocks. I am an entrepreneur and DYI investor seeking financial wealth on my own premises.

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