Hitting That 'Easy' Button Again

 | Jan 20, 2012 | 12:00 PM EST
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This commentary originally appeared Jan. 20 at 10 a.m. EST on Real Money Pro -- Click here to learn about this dynamic market information service for active traders. 

Office-supply giant Staples (SPLS) accounts for about 10% of all office products sold worldwide, and the company dominates its space in both physical stores and on the net. From fiscal years 1996 through 2007, the firm saw almost uninterrupted earnings-per-share growth. The bottom line dipped in the recession of 2008 to 2009, then picked up again in 2010 and 2011.

Below is a chart of Staple's growth from fiscal years 2001 to 2011 (each fiscal year ends Jan. 31 of the following year).

Staples (SPLS) -- Earnings Performance

Staples' impressive numbers commanded a 10-year median price-to-earnings multiple of 19x as the stock grew from a (split-adjusted) 2001 low of $7.30 to a peak of $28 in 2006. The stock touched $23.60 almost exactly one year ago.

Staples (SPLS) -- Daily
Source: BigCharts.com

As of Thursday's closing quote of $15.95, Staples is now being offered at less than 11.7x the $1.37 consensus estimate for the fiscal year that concludes this month. It's also priced to reflect more than 10.7x the $1.50 earnings expectation for the next 12 months.

Technicians in the crowd may want to note that Staples shares recently broke above their 200-day moving average. The stock appears poised to fill the gap created right after first-quarter results were released last May. Eight months of basing action has given weak holders plenty of time to exit their positions.

On the payout side, management initiated cash dividends in 2004 and distributions have been increased each year since. The $0.10 quarterly payment provides an attractive 2.53% current yield.

What is the proper price for Staples? Well, Morningstar assigns the stock its highest rating of five stars, and calls fair value as $25. Standard & Poor's carries a 12-month target price of $20. Even 14x forward EPS would bring the shares back to $21.

You have a very good shot at 25% to 50% gains, plus the dividend income. Downside appears limited. The panic low in 2008 was $13.60, and today's price is below the absolute nadirs in the three-year period from 2005 to 2007.

Put sellers could make nice profits if Staples performs as expected. Even if the stock fails to recover fully, you'd end up with a better entry point than what's presently available.

Staples (SPLS) -- The Trade

Staples (SPLS) -- Options Pricing

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