(RTTNews) - Monday, Credit Suisse downgraded Office Depot, Inc. (ODP: News ) shares to Underperform from Neutral with a price target of $4.

Analyst Balter does not believe that the company will grow margins to levels that are supportive of current valuations. The analyst believes a pair trade with OfficeMax (OMX) provides investors with protection from a macro recovery while playing a much cheaper multiple name, one he believes has better growth prospects.

The analyst believes, even with the recent sell-off, the market is overly optimistic on the turnaround scenario at ODP. The analyst believes that the market is being too dependent on macro trends and on the assumption that when these trends reverse margins will return to prior levels.

The analyst said that yet productivity is over 30% lower in retail, competition is higher in that segment, ODP has ongoing numerous investigations going on in its government BSD division and International has struggled. This quarter, OMX passed ODP in growth in BSD, marking an important turn for both chains.

The analyst believes that a more realistic scenario of 2010 values the stock at over 11 times EBITDA. ODP has taken significant charges over the last eight years making earnings comparisons harder to analyze. Even with those charges lowering many costs the company is projected to lose money next year. That may artificially inflate reported earnings but should be captured in the EBITDA calculation.
The analyst's price target of $4 is based on a 6x EBITDA multiple on what he views as a reasonable 2012 estimate of $300 million, which he then discount back two years at 14%. Shares of ODP currently trade at 11.2x the analyst's 2010 EBITDA estimate.

Conversely OMX trades at 3.7x the analyst's 2010 EBITDA estimate, and he believes both companies should trade together as both should enjoy a recovery if and when the macro improves.

Currently, ODP is down $0.24 or 3.97% and trading at $5.81.

To receive FREE breaking news email alerts for Office Depot Inc and others in your portfolio

by RTT Staff Writer

For comments and feedback: contact editorial@rttnews.com