Thursday, April 7, 2011

Office Depot Inc (NYSE: ODP) Q2 2011 Price Target

Recent price: 4.34$
P/E Ratio: 162.67
3 Months Target Price: 6$

Company Description
Data provided by Reuters lets us know that Office Depot, Inc. is a global supplier of office products and services. The Company operates in three business segments: North American Retail Division, North American Business Solutions Division and International Division. The North American Retail Division includes its retail office supply stores in the United States and Canada, which offers office supplies and services, computers and business machines and related supplies, and office furniture. The stores also offer a copy and print center offering printing, reproduction, mailing and shipping. The North American Business Solutions Division sells office supply products and services in the United States and Canada directly to businesses through catalogs, Internet Websites and a dedicated sales force. Its International Division sells office products and services through catalogs, Internet Websites, a dedicated sales force and retail stores.

Confidence Margins
Strong resistance $7.07 (+63%)
Light resistance $6.25 (+44%)
Light support $3.78 (-13%)
Strong support $3.36 (-23%)

Shares of Office Depot plunged on march 31st when the company announces that the Internal Revenue Service has denied the Company’s claim to carry back certain tax losses to prior tax years under economic stimulus-based tax legislation enacted in 2009, which claim was made after the Company consulted with its tax advisors. As a result, the Company has reassessed the carry back of tax losses in 2010 to prior periods and will restate its financial results to revise the accounting treatment regarding its original tax position. The periods covered by the restatement are the fiscal year ended December 25, 2010 and the quarters ended June 26, 2010 and September 25, 2010. The expected impact of correcting the 2010 financial statements is to reduce full-year tax benefits by approximately $80 million, change net earnings for 2010 from $33 million to a net loss of $46 million and increase the net loss attributable to common shareholders from $2 million or $0.01 per share to $82 million or $0.30 per share. Additionally, the $63 million current tax receivable associated with the carry back amount will be removed from the balance sheet at December 25, 2010 and will adversely impact anticipated 2011 operating cash flow.

Office Depot is still trading a pretty high fundamental multiples even before the 2010 statements were correct.

Entry strategy
For the cautious investor:
Buy the stock for 5$ or less.

For the risk-taking trader:
The September 2011 4.50$ out-of-the-money call option contract seems to be the right position to take, they can be acquired for about 50$ per contract.

Exit Strategy
For the cautious investor:
Sell when the stock reaches 6$, or keep it until 7$ if you are more bullish in your own analysis.

For the risk-taking trader:
The contracts should be kept until the underlying reaches around 6$. This should provide a satisfactory return if the underlying reaches the target price as the contracts will get in the money.

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