Last time we looked at Office Depot (ODP), it traded as though it were on the brink of bankruptcy. Since its low 3 months ago, however, the stock is up around 500%! While its debt situation and poor operating performance make it an unlikely value candidate, we couldn’t resist discussing the stock because of its upside potential.
The entire company was selling for around $160 million, but operating and investing cash flow over the last three quarters has exceeded $400 million! The company has managed to produce this cash by selling some of its land and buildings and by drastically reducing inventories. (The average store held about $830,000 worth of inventory last year; today it carries only $630,000, with the extra cash helping to shore up the balance sheet.)
Furthermore, the company’s joint venture in Mexico appeared to be worth more than the valuation the market was giving the entire company! The Mexican operation earned another $12 million of net income in the first quarter of 2009.
Poor decision-making has gotten Office Depot to a point where it now has to sell assets at terrible prices. Nevertheless, further asset sales to the tune of another $200 million are anticipated (compare this to its market cap of $160 million just three months ago!), which will increase cash flows and improve the company’s liquidity position. 
Operationally, the company has closed more than 100 stores already this year, and another 150 or so have leases that expire in 2009, which should allow it to lower its costs even more. As we saw with Build-A-Bear, ODP may even be able to reduce its rent requirements on stores whose leases are not expiring. While Office Depot is not out of the woods yet, it certainly has the ability to stay afloat and reward those who invested at the height of the market’s fear.
Disclosure: Author has a long position in ODP