Retail Stocks

Staples Inc Valuation – February 2017 $SPLS

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Staples Inc (SPLS) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Staples, Inc. is a provider of products and services for business customers and consumers. The Company offers a selection of products, Websites and mobile platforms, and a range of copy, print and technology services. The Company operates through three business segments, which include North American Stores & Online, North American Commercial and International Operations. The North American Stores & Online segment includes its retail stores and Staples.com businesses in the United States and Canada. The North American Commercial segment consists of the United States and Canadian businesses that sell and deliver products and services directly to businesses, including Staples Advantage and Quill.com. The International Operations segment consists of businesses in approximately 25 countries in Europe, Australia, South America and Asia. It serves businesses of all sizes and consumers in North America, Europe, Australia, South America and Asia.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of SPLS – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $5,727,572,345 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.65 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -94.62% Fail
6. Moderate PEmg Ratio PEmg < 20 89.11 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.26 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.65 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.49 Pass
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

EPSmg $0.10
MG Growth Estimate -4.25%
MG Value $0.91
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $1.46
MG Value based on 0% Growth $0.86
Market Implied Growth Rate 40.30%
Current Price $8.97
% of Intrinsic Value 986.10%

Staples, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $0.72 in 2013 to an estimated $0.1 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 40.3% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Staples, Inc. revealed the company was trading above its Graham Number of $0. The company pays a dividend of $0.48 per share, for a yield of 5.4%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 89.11, which was above the industry average of 50.09. Finally, the company was trading above its Net Current Asset Value (NCAV) of $0.91.

Staples, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $0.91
Graham Number $0.00
PEmg 89.11
Current Ratio 1.65
PB Ratio 1.26
Current Dividend $0.48
Dividend Yield 5.35%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2016
Total Current Assets $5,334,000,000
Total Current Liabilities $3,241,000,000
Long-Term Debt $1,024,000,000
Total Assets $9,387,000,000
Intangible Assets $2,212,000,000
Total Liabilities $4,740,000,000
Shares Outstanding (Diluted Average) 653,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate -$0.61
Jan2016 $0.59
Jan2015 $0.21
Jan2014 $0.94
Jan2013 -$0.31
Jan2012 $1.40
Jan2011 $1.21
Jan2010 $1.02
Jan2009 $1.13
Jan2008 $1.38
Jan2007 $1.32
Jan2006 $1.04
Jan2005 $0.87
Jan2004 $0.61
Jan2003 $0.63
Jan2002 $0.27
Jan2001 $0.10
Jan2000 $0.45
Jan1999 $0.27
Jan1998 $0.26
Jan1997 $0.23

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.10
Jan2016 $0.49
Jan2015 $0.53
Jan2014 $0.74
Jan2013 $0.72
Jan2012 $1.24
Jan2011 $1.17
Jan2010 $1.16
Jan2009 $1.21
Jan2008 $1.18
Jan2007 $1.01
Jan2006 $0.80
Jan2005 $0.62
Jan2004 $0.47
Jan2003 $0.38
Jan2002 $0.26
Jan2001 $0.26

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – November 2015
Staples Inc. Analysis – September 2015 Update $SPLS
17 Companies in the Spotlight This Week – 9/20/2014
Staples Inc. Annual Stock Valuation – 2014 $SPLS

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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