Monday, June 25, 2007

Office Depot (NYSE:ODP): Four firms cutting ests over the weekend

We have 4 firms lowering their estimates on Office Depot (NYSE:ODP) over the weekend:

- Deutsche Bank says they believe the recent slowdown in the economy continues to impact
Office Depot's results. As such, they are reducing their quarterly and annual EPS estimates (Q2 goes to $0.41, below last year's $0.43, FY07 goes to $2.10 from $2.26 and FY08 to $2.42 from $2.64, up 15% y/y). The biggest changes to firm's forecasts come on the top line, which in turn will lead to SG&A deleverage. Despite these changes, they are maintaining Buy rating as they believe a strong balance sheet should support downside.

- Citigroup notes they are lowering second and third quarter estimates for Office Depot on belief that since the company provided guidance in April, sales in the North American Retail and Delivery segments have further deteriorated primarily due to a challenging macroeconomic environment.

While the Street had already anticipated an earnings miss, it will likely be slightly greater than expected. In addition to cutting 2Q estimate by $0.04 to $0.42, $0.06 below cons., they are also cutting 3Q by $0.04 to $0.56, as they believe the sales softness will likely persist through the summer. While the shares are attractively valued at these levels, trying to find a bottom in the shares could prove challenging. Citi thinks there could be some further downside from here and that a better buying opportunity may present itself over the next several months. Maintains Buy. Taget is cut to $51 from $52.

- Banc of America is adjusting downward their below consensus estimates for ODP on concerns the current environment is proving difficult to drive top line growth both in the NA Retail and Contract divisions. Firm's estimate for Q2 goes to $0.43 from $0.46, Q3 is lower by $0.02 to $0.55 and the year is now $2.15E from $2.20. 2008E is now $2.48 from $2.51. Channel checks and conversations with industry contacts lead them to believe business has decelerated. They fear that an increasingly competitive promotional environment could also inhibit margin expansion opportunities. Maintains Neutral, $37 tgt.

- Goldman Sahcs cuts their estimates as follows: FY2007 to $2.24 (down $0.07), FY2008 to $2.63 (down $0.07), and FY2009 to $3.14 (down $0.06). Cuts primarily reflect lower NA Retail and Delivery sales, and a delay to the firm's gross margin recovery. Neutral, $40 tgt.

Notablecalls: I'm somewhat surprised to see four large firms cut their estimates almost simultaneously. Probably a case of analysts not wanting to diverge from the herd. I suspect the stock will get hurt today as some investors will surely panic and sell. We have Citi out basically saying there could be further downside from here. Yet, they have the highest target on the Street for ODP.

I think ODP may lend itself to a scalp short early on but I'm not expecting any major downside here. The valuation's too low for that. More agressive trading accounts may even catch ODP for a quick bounce around the $32 level.

No comments: