Dow Jones Newswires | Shares of Office Depot Inc. and OfficeMax
Inc.  traded sharply higher Monday after analysts said they saw
improvement in the office-supply industry in the first quarter.

Office-supply companies have been hurt by the recession as consumers and
businesses curbed spending and delayed big purchases. But Credit Suisse
said in a note Monday that channel checks point to a modest but slow
improvement last quarter. “This sector has not yet seen the pickup other
retail sectors have shown,” the firm said, hinting at room for growth,
as it raised its stock-investment rating on Office Depot to neutral from
underperform.

Shares of Office Depot are up 7.1 percent, to $9.05, while OfficeMax is up 6.3 percent, to $17.68. Both are trading at their highest points since mid-2008.

Jefferies & Co. also pointed in a note Monday to recent strength in the industry “in addition to the possibility of increased discretionary spending.”

Office Depot, which Tuesday will be the first of the big players to report first-quarter results, has posted just one profitable quarter in the last seven. It has been pressured by its heavy exposure in California and Florida — two of the states hardest hit by housing foreclosures. Credit Suisse also points out that it has the highest exposure to the weakest state governments.

However, late last year and early this year there’s been “some stability on the employment front and certainly white-collar employment is important for the office sector to perform well,” said Scott Tilghman of Hudson Square Research.

Tilghman added that while large business customers in 2009 were purchasing on-contract office supplies, or certain products they may get better pricing on, the retailers have noted they were beginning to see their customers buy off-contract, which can drive revenue and profit.

“It also provides the opportunity to derive margin in some cases,” he said.

Credit Suisse said that its change to Office Depot’s rating is a recognition that the backdrop is improving and the company is “among the most levered names to a late-cycle recovery in business spending.”

While the outlook for the sector is brighter, office-supplies giant Staples Inc.’s shares weren’t benefiting as much Monday as those of Office Depot and OfficeMax. Tilghman attributes that to the premium valuation Staples’ shares have been commanding for some time.

Staples’ shares were recently up 0.4 percent, to $24.70. But Tilghman said that with Staples at 8 times earnings before interest, taxes, depreciation and amortization, there is room for the stock to grow. He said that in more normalized economic environments, retailers usually peak at 10 times ebitda, or even in the range of 10 to 12 times.