Phil Town
Phil Town

Here's an interesting workup.  Notice how Shane is seeing the CEO discuss MOAT.  The things the CEO thinks of as protection against competition - customer service, being the best -  add up to one kind of moat: Brand.

If they continue to execute on these things, people will continue to buy the brand.  And if they don't, then the moat will be breached and the sales will deteriorate.  So, Shane, if you do this one, you will need to watch to see if the Moat is still good in your business.  Keep an eye on customer service.  Now, on to Shane's letter, and my critique at the end.


I am doing an analysis on Staples.  Here is what I have so far.  Let me know what you think.

Meaning: I get my office equipment/supplies at Staples.  I have found them very good to work with.  For example, I had a fax machine that I bought one year ago.  It broke.  Now, the warranty was 30 days.  I called the manager, he said to bring it back and he would take care of me.  He exchanged it for a better model.  I am very impressed with much of Staples.

Management: Ron Sargent is CEO.  He is very quick to praise associates.  In fact, he says Staples will stay on top "because of our talented associates."  His "BAG" is to continue to be the best in the industry.  Staples is the largest and he wants to continue that by using his Moats.

Moat:  According to Ron on his CEO message, he thinks Staples has 3 moats.  1, execution of customer service - again, he praises associates highly.  2, Differentiation in the market place both through ease of shopping and through product differences.  3, Market leadership - he is determined to be the best in every location.

MOS: According to Investools, sticker price should be $35.23.  With a 50% MOS, should be willing to pay $18.  Current price is $23.75.  I think that is pretty close.  It is not quite 50% but it is close.

It has 5 greens for Phase 1, but debt/equity ratio is pretty large.  Phase 2 looks ok.

Here is my final opinion.  I have it in my buy watch list.  When I get 3 fresh greens, I think I will give it a try.  The stock has split 8 times in the 16 years it has been public.  I think that is a pretty good sign.  They are releasing quarterly results next week.  That will be interesting to see the results of that.

I spoke with the manager of our local Staples in depth the other day. He says the message from the CEO to store managers has never changed since he has been with the company.  It has always been about customer service!!

I have not put all of the numbers in this email because it is so easy just to click and see it on the website.


My analysis:


Let's see if we like the projected growth rate: I look at Equity growth and calculate a rate with the Rule of 72.  It just takes a second.

In this case the equity is growing at 18%-24% a year.  That makes me feel really good about the projection made by analysts - 16%.  I'm guessing they are worried about the next 5 years if there is an economic downturn and retail starts to suffer.  But Staples isn't exactly retail like clothing.  More businessy.  It could do better than they expect.

In any case, 16% looks conservative enough.  That puts the multiple at 32, which historically Staples gets a lot -- but the average PE is 30, so we'll use that as well.  That, as Shane says, puts the Sticker at $35. Its selling for $23 and Shane is going to buy it at the next opportunity (when he gets three greens.)

My minimum MOS is 20% below Sticker IF I really know the business.  For example, if Staples is selling for $28 and I had been buying it and knew the business well, I'd step in and buy it again at that price and try to see it run up to Sticker.  So, Shane, it's your call.  While I'd like to see you jump in here with a bigger MOS, if you really know this biz, want it to be your sole means of support for the next 100 years, then go for it next chance.