Office Depot (NYSE:ODP) Faces Short-term Risk, 2011 a Year of Transition

In the short term things will remain challenging for Office Depot (NYSE:ODP), which faces loss of some government business and the transition to a new CEO.

FBR commented, "Meetings with the CFO yesterday (Wednesday) supported the case that the company is on an upward, yet nonlinear, trajectory. Upside centers around new faces on the BOD (more to come, in our view) and on the prospects of a new CEO. Short-term risk to earnings into 1H11E is high, in our view, because of the likely dislocation regarding known government business attrition: the U.S. Communities contract (we estimate it retains 70%), as well as other business, such as the State of California ($20M) and some of the State of Florida business (a portion of the $30M–$40M book of business). This sets 2011E up as a year of transition, under a new CEO, when someone is appointed. We believe that the shorter-term risks are largely in the stock here at 0.15x EV/sales. Nonetheless, short-term investors should take note; we expect further clarity about the potential dislocation over the next two to three quarters. On the positive side, retail same-store sales trends, the company’s "direct" business, and international segments have been improving."

Office Depot closed Thursday at $4.68, gaining $0.17, or 3.17 percent. FBR maintains an "Outperform" on the company and a price target of $7.