Entering The Hospitality Market Could Unlock New Opportunities, But Economic Challenges May Impact Future Performance

Key Takeaways

• Strategic shift to B2B and hospitality could unlock growth, leveraging large market opportunities and potentially boosting revenue.
  
• Restructuring plan and new industry expansion aim to enhance margins, profitability, and competitive position through cost reduction and leveraging existing assets.
  
• Economic challenges and shifting consumer priorities threaten ODP's revenue, while investment strains and strong competition impede growth in traditional and new market segments.

Catalysts

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

• The strategic pivot towards B2B and expansion into the hospitality industry could unlock significant growth opportunities for ODP by entering the $16 billion hospitality supply market, thereby potentially boosting revenue.
  
• Notable wins in the company's traditional B2B segments, such as securing a $1.5 billion contract, are expected to contribute significantly to future revenue streams and the stabilization and improvement of top-line performance.
  
• The Optimize for Growth restructuring plan aims to accelerate B2B revenue growth and reduce fixed costs associated with retail operations, which could improve net margins and overall profitability.
  
• Expansion into new industry segments beyond traditional office supplies, including healthcare and other adjacencies, opens a substantial revenue opportunity in a $60 billion total addressable market.
  
• Successful onboarding of high-profile contracts within the supply chain business could drive future earnings growth by leveraging the company's distribution network and supplier increase to enhance its competitive positioning.

ODP Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ODP's revenue will decrease by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.5% today to 0.9% in 3 years time.
• Analysts expect earnings to reach $56.6 million (and earnings per share of $2.35) by about March 2028, down from $106.0 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 16.5x on those 2028 earnings, up from 4.1x today. This future PE is lower than the current PE for the US Specialty Retail industry at 16.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

ODP Future Earnings Per Share Growth

Risks

• The company's reliance on macroeconomic conditions could pose risks, as ODP faces lower sales in both B2C and B2B channels due to economic challenges, potentially impacting revenue.
  
• Severe weather conditions and operational disruptions in major markets could negatively impact operations and customer behavior, putting additional pressure on revenues and margins.
  
• The shift in consumer spending priorities due to rising energy and food costs poses a risk to retail sales, impacting ODP's revenue from its traditional office supply business.
  
• The necessity to invest significantly in new markets like hospitality while facing economic difficulties could strain resources and impact net margins if anticipated growth doesn't materialize.
  
• High inflation and constrained corporate budgets, combined with strong competition and structural declines in certain product categories, pose risks to achieving desired revenue growth and profitability in ODP's B2B segment.

Valuation

• The analysts have a consensus price target of $29.333 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 $36.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.2 billion, earnings will come to $56.6 million, and it would be trading on a PE ratio of 16.5x, assuming you use a discount rate of 11.4%.
• Given the current share price of $14.65, the analyst price target of $29.33 is 50.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.