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Impressive second quarter 2012 results that included a 71.4% earnings surprise coupled with positive earnings surprises in the last four trailing quarters with an average beat of 31.4% helped OfficeMax Inc. achieve a Zacks #1 Rank (Strong Buy) on October 2.      

Since its second quarter report, shares of this office product supplier have been touching new highs and surged about 67.6% to hit their 52-week high of $8.33 on September 17. Moreover, with a solid year-to-date return of 56.9%, reinstatement of quarterly dividend and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Better-than-expected second quarter earnings, innovative products and services and effective cost management– are the primary rank drivers for this stock.

OfficeMax, which competes with Office Depot Inc. (ODP - Analyst Report), declared second-quarter results on August 2 wherein earnings of 12 cents per share surpassed the Zacks Consensus Estimate by more than 71% and increased substantially from 7 cents in the prior-year quarter. The quarter's earnings were aided by effective cost management.

The quarter’s downside was the total sales, which dropped 2.7% from the year-ago period to $1,602.4 million, and also fell short of the Zacks Consensus Estimate of $1,638 million. However, operating income was strong and surged 29.1% to $23.1 million, and operating margin expanded 30 basis points to 1.4%.

OfficeMax is curtailing costs, closing underperforming stores and focusing on providing innovative products and services, which should all contribute to margin improvements. The company should gain from recent growth initiatives, which include the ImPress copy and print and Ctrlcenter PC services, janitorial and sanitation supply, category management, and managed print businesses. The company’s digital as well as technology and document solutions are also gaining traction.

OfficeMax’s store-in-a-store initiative known as New Channels is gaining momentum. The company manages the office supply departments of other retailers (including supermarkets, convenience stores and drug stores), and provides category management services. Such initiatives provide avenues outside its stores, and would help in augmenting its profit margins and returns on investment.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 1.4% to 74 cents per share in the last 60 days. The current estimate implies a year-over-year growth of 21.5%. Moreover, for 2013, Zacks Consensus Estimate increased 1.3% to 80 cents a share, reflecting an estimated year-over-year growth of about 8%.

Valuation

OfficeMax currently trades at a forward P/E of 10.31x, a 38.85% discount to the peer group average of 16.86x. Also, on a price-to-book basis, the shares are trading at 1.17x, a 51.85% discount to the peer group average of 2.43x. Based on the company’s fundamentals and a projected long-term earnings growth of 10.4%, we expect the company’s discount to narrow in the coming quarters.

About the Company

Founded in 1913 and headquartered in Naperville, Illinois, OfficeMax Incorporated (formerly known as Boise Cascade Corporation) and its subsidiaries distribute office supplies and paper, print and document services, technology products and solutions, and office furniture to business enterprises, government offices and consumers.

The company, through approximately 29,000 associates, serves its customers via direct sales, catalogs, Internet and retail stores located in the United States, Canada, Australia, New Zealand, Mexico, the U.S. Virgin Islands and Puerto Rico. The company has a market cap of $661.8 million.

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