Critical B2B Pivot And Tech-Driven Supply Chain Modernization Propel Growth

Key Takeaways

• ODP's shift to B2B aims to boost revenue by leveraging supply chain strengths and expanding into high-growth markets like hospitality.
  
• Technology integration and new e-commerce contracts in the Veyer business may enhance efficiency, expand margins, and diversify revenue streams.
  
• ODP's struggles include macroeconomic pressures, competitive retail challenges, and transition difficulties, impacting revenues, margins, and financial stability amidst strategic B2B shifts.

Catalysts

Provides business services and supplies, products, and digital workplace technology solutions for small, medium, and enterprise businesses in the United States, Puerto Rico, and the U.S.

• ODP's pivot to B2B is expected to drive future revenue growth by securing new contracts and expanding into adjacent high-growth markets like hospitality, which leverages their existing supply chain strengths and customer base.
  
• The significant contract win, valued at up to $1.5 billion over ten years, is expected to be accretive to revenue and earnings, providing a substantial boost to ODP's top line and long-term growth trajectory.
  
• Investments in technology integration within the Veyer supply chain business aim to modernize operations, which can enhance efficiency and potentially expand net margins.
  
• The pursuit of new contracts in e-commerce warehouse and fulfillment services for large brands could diversify Veyer's revenue streams and contribute to EBITDA growth.
  
• ODP plans to optimize the B2C business model, potentially improving net margins and earnings by reducing fixed costs and re-evaluating store footprint strategies.

ODP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ODP's revenue will decrease by -2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $180.1 million (and earnings per share of $6.13) by about November 2027, up from $26.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.8x on those 2027 earnings, down from 28.9x today. This future PE is lower than the current PE for the US Specialty Retail industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.56%, as per the Simply Wall St company report.

ODP Future Earnings Per Share Growth

Risks

• ODP's third-quarter results were below expectations due to weak macroeconomic conditions and challenges in the retail division, which negatively impacted B2C and B2B demand, potentially affecting future revenues and net margins.
  
• The impact of major hurricanes in key markets disrupted operations and customer activities, which could lead to volatility in earnings and unforeseen financial impacts.
  
• The company faces ongoing pressure from a highly competitive retail environment, particularly in back-to-school sales, and shifts in consumer spending due to rising energy and food costs, which could continue to pressure revenues and net margins.
  
• The transition to B2B is still in progress and may take time to reflect in financial results, indicating potential fluctuations in revenue and uncertainty in achieving short-term growth targets.
  
• Substantial investments in B2B growth initiatives and pivot strategies may reduce the pace of share repurchases and incur near-term financial strain, potentially impacting earnings and free cash flow.

Valuation

• The analysts have a consensus price target of $41.33 for ODP based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $61.0, and the most bearish reporting a price target of just $28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.7 billion, earnings will come to $180.1 million, and it would be trading on a PE ratio of 8.8x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $24.92, the analyst's price target of $41.33 is 39.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.