A federal judge has blocked the planned merger of Staples, Inc. SPLS and Office Depot Inc ODP, citing antitrust concerns. UBS' Michael Lasser downgraded the rating for Staples from Buy to Neutral, while reducing the price target from $14 to $10.50. The analyst expects the company’s EPS to stagnate and believes that strategic actions would be insufficient “to make the story compelling.”
EPS Likely Stagnates
On a stand-alone basis, Staples’ EPS is expected to stagnate. “Without the value creation potential from a merger with ODP, SPLS' investment case rests on a strategy that it hopes will help it confront the intense currents afflicting the office supply sector,” analyst Michael Lasser wrote.
Staples has executed well in diversifying its business over the past few years, with categories outside core office supplies now contributing about 50 percent of total sales. Lasser commented, however, that this may be insufficient to “drive sustainable growth for the foreseeable future,” since sales from higher growth categories may not completely offset the decline in sales in other categories.
Strategic Actions Not Enough
After the merger was blocked, Staples announced plans to take steps to move ahead. The analyst said, however, that these would not be enough to “reverse years of sales and margin declines.”
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