Monday, February 27, 2012

OfficeMax's Price Up, Value Down

OfficeMax was discussed on this site just two months ago as a potential value investment. Since then, it's price is up some 40% while its value is (in my opinion, at least) down. As a result, OMX now makes the migration from the Stock Ideas page to the Value In Action page, and taught us a couple of lessons in the process.

OfficeMax's balance sheet looks absolutely horrendous at first glance. But a key lesson for investors is that first glances can be very deceiving. Though the company shows $1.7 billion of debt on its books, which the company could not hope to pay off with its paltry cash flow levels, $1.5 billion or so of that is non-recourse. (For more on how that works, see here.) Removing this non-recourse debt from the balance sheet actually puts the company in a net cash position!

But while Mr. Market appeared to rejoice at the company's latest conference call last week, where the CEO proudly announced several times that declines are slowing (it sure doesn't take much these days - I guess it's just that kind of market!), a silent but very deadly liability has reared its ugly head. OfficeMax's unfunded pension liability (the difference between the plan's assets and an estimate of the present value of what it will owe) jumped from $180 million to $330 million. The entire company's market cap is only $500 million, so this is an important development indeed!

For whatever reason, Mr. Market completely missed this change or deemed it unimportant (at least it did until, perhaps, Friday). Yours truly, however, sees this as a risk and a cash drain. This year, the company plans to pay $30 million into the plan to help fund it. This is not a trivial amount, as it represents more than half of the company's operating cash flow for all of 2011! Even though the plan is frozen, it may prove to be a big drain on what would otherwise be shareholder funds!

Chalk the gains from OfficeMax up to a little bit luck and a little bit margin of safety. The price went up big even though the value dropped significantly. Happy investing!

Disclosure: No position


Anonymous said...


How about SuperValu's pension liabilities? Do you still hold position on stock?

- tooki

Saj Karsan said...

Hi Tooki,

SuperValu's pension is relatively small compared to its other liabilities. I do still like it, and wrote about it less than a month ago.