Staples, Inc. (SPLS): Still a Good Investment After Revenue Miss and Merger News

Owner earnings

I like to look at owner earnings instead of net income or free cash flow for valuation purposes. My calculation of owner earnings for 2012 yields $1.045 billion, or $1.56 per share. Note that this includes tax-adjusted interest payments, since I’m taking into account the debt directly in my valuation.

To value Staples I’ll do a discounted cash flow analysis, with discount rates of 12% and 15% used to define a fair value range. I’ll assume 3% annual owner earnings growth. Using these parameters and subtracting the $1 of net debt I arrive at a fair value range of $12.39 – $16.85. This is a bit lower than a calculation I did in a previous article, since this reflects the new results. But these are inherently rough calculations to begin with, and the fact that the results are to the nearest penny should not delude you into thinking that the precision is actually that high. Valuation is more art than science. It’s a game of rough estimations subject to change based on new information.

The bottom line

With Staples, Inc. (NASDAQ:SPLS) currently trading around $13.50 per share, towards the lower end of my fair value range, Staples offers some value here. The stock was trading near $11 per share a few months ago, a much better deal than now, but $13.50 still offers a reasonable entry price. I’ve bought Staples stock on two different occasions, first for $12.99 per share and then again for $11.69 per share, with an average cost basis of $12.27. I’m much more comfortable with that number than $13.50, so waiting for a pullback is not a bad idea. With cost-cutting efforts underway and a strong focus on ecommerce I believe that Staples is a good long-term investment.

The article Still a Good Investment After Revenue Miss and Merger News originally appeared on Fool.com and is written by Timothy Green.

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