A 'first look' at ODP after a quarter century
Recently on the Value Investors Club forum, someone pitched office-supply retailer and distributor ODP (ODP) – formerly known as Office Depot.
This caught my eye because it was one of my most profitable investments in the early days of my hedge fund, nearly a quarter century ago.
ODP had an exceptional period of growth in the 1990s. The stock rose more than 10-fold to nearly $250 by early 1999.
But by the end of 2000, it crashed to less than $70 amid earnings misses, rising interest rates, and investor concerns about Internet-based competition.
That same year, the company replaced its CEO. And the new CEO, Bruce Nelson, immediately laid out his vision for turning the company around.
After I heard his plan, I concluded that the sell-off was overdone. In the first week of 2001, I snapped up shares at $81.
It was a great call, as the stock more than doubled over the next year. That made it the second-best-performing stock in the S&P 500 Index in 2001. (Fun fact: Nvidia (NVDA) was No. 1.)
As you can see in the chart below, I sold too early in 2002 at an average price of $168.50. ODP went on to soar to an all-time high of around $445 in May 2006:
But since then, it has been all downhill. The stock closed yesterday at $21.16. That means it has lost more than 95% of its value in the past two decades.
I have to imagine how demoralized ODP shareholders are. But would it be possible to catch another double on this stock a quarter century later?
To answer that, I'll take a look at ODP's financials through my "first look" lens...
As one would expect, the stock price has followed earnings over the past three decades:
The trend over the past 10 years has been terrible, but this dark cloud has two silver linings...
While operating income has been cut in half, it's still positive at $206 million over the past 12 months. And the stock being down nearly 80% over the past decade possibly indicates the sell-off is overdone.
ODP's cash-flow statement tells a similar story of declining, yet still positive, free cash flow ("FCF") in that time frame:
When considering a turnaround, a strong balance sheet is critical. So it's good to see ODP has a modest and stable amount of net debt:
Turning back to the cash-flow statement, let's take a look at capital allocation...
Overall, it has been pretty dismal. Its acquisitions in 2003 and 2017 have been busts, as each had a purchase price larger than ODP's entire market cap today.
And share repurchases have been poorly timed, at the stock's relative highs in 2005, 2006, and the past four years:
At least ODP was able to buy back 43% of its stock in the past four years:
But these share repurchases came at a steep price. From 2021 to 2024, ODP spent $1.2 billion buying back stock. That's nearly double its market cap today...
Overall, the financial picture isn't pretty – but it's not a disaster, either. While declining, the company's operating income and FCF remain positive, and net debt is manageable.
Turning to valuation, as of yesterday, ODP has a market cap of $667 million and net debt of $761 million. That gives it an enterprise value of $1.4 billion.
Only three analysts follow the company, which is a plus, in my opinion. They expect ODP to earn $2.92 this year (down from $3.30 last year) and $2.88 in 2026. That means the stock is trading at a mere 7.2 times this year's and next year's expected earnings.
At that multiple, any good news could send the stock soaring.
Might that happen? The author of the Value Investors Club pitch thinks so...
I'll cover that in tomorrow's e-mail, so stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.