Today marks the first trading day of the last trading month of the year. We are all wondering whether the politicians will be able to avert the "fiscal cliff" so we can quit hearing about it 100 times a day and be able to make investing plans for 2013. Politics aside, I am beginning the process of reviewing all the positions in my portfolio. This has been a December tradition for me for as long as I have run my own portfolio. To me, it is the equivalent of "spring cleaning," a time to look at everything I have in my garage and determine what to keep and what to throw out.
One of the first positions I have reviewed is my stake in Staples (SPLS). The company came to my attention over the weekend when it announced they will be offering three-dimensional (3-D) printing services in its stores. A customer will be able to upload a 3-D printing file from home and then pick up the printed object in the store or have it shipped. I believe 3-D printing will be one of the top 10 technologies that change the world over the next two decades. I don't know if this will have more than incremental impact on sales, but it puts the "cool factor" in Staples' corner for the first time in recent memory.
Obviously, I would have to like Staples for other reasons for it to maintain a stake in it going into 2013. The stock has meandered in a narrow range over the last six months after I picked it up after it fell sharply in the second quarter. After reviewing Staples, I think it remains attractive for a variety of reasons.
Market Leadership: Staples is the clear market leader in the office supplies sector. Its two main competitors Office Depot (ODP) and OfficeMax (OMX) are still struggling operationally. Over the last five years, Staples is the only one of the three that has shown positive average annual revenue growth. When small business activity starts to recover, Staples will likely be a beneficiary of the recovery in that space.
Valuation: SPLS is cheap, as the stock is trading at just over 8x forward earnings and around 4x EBITDA. At under $12 a share, the stock is selling at the bottom of its five-year valuation range based on P/B, P/S, P/E and P/CF.
Yield: The stock yields 3.8% and has a payout ratio of a little over 30%. It has a strong balance sheet and has raised its payout an average of 8% annually over the past five years.
Private Equity Kicker: Rumors about private equity being interested in acquiring Staples have been present over the last six months. Given Staple's consistent cash flow, market leadership and relatively low market capitalization (under $10 billion); I think this is possibility at some point on the horizon. An acquirer could offer a 35% premium and still acquire Staples for under 6x EBITDA.
For all of these reasons, I am keeping my stake in Staples and looking forward to a brighter 2013 for this stock.