UPDATE: UBS Upgrades Staples, Inc. (SPLS) to Buy on Favorable Risk/Reward

(Updated - March 23, 2015 9:46 AM EDT)

UBS upgraded Staples, Inc. (NASDAQ: SPLS) from Neutral to Buy with a price target of $20.00 (from $18.00). Analyst Michael Lasser thinks a pull-back creates good risk/reward and an attractive entry point. He also thinks the market is to pessimistic on Office Depot (NASDAQ: ODP) deal success.

"We recognize that the NT path for the stock will depend heavily on SPLS' ability to close its acquisition of ODP, but we think this is more likely than not. We est. the market is only assigning a 35% likelihood to the deal’s success. Based on our discussions with FTC experts & large enterprise OS customers, we think a more realistic probability is ~65%. Using these more optimistic odds yields a probability weighted share PT of $20, representing 23% potential upside. Looking at it another way, if the deal happens, the shares should have ~$8 of upside by the end of the year. However, the shares prob have ~$3 of downside if the acquisition is blocked," said Lasser.

"If the FTC blocks the deal or places onerous conditions on a transaction, we think SPLS will still be fine. Most likely, it will face a far weakened competitor in ODP as this player will probably face heavy staff attrition & operational disruption between now and when the ruling on the deal comes down. When the SPLS/ODP merger was blocked in ’97, SPLS was able to put sustained distance between itself & the competition. Besides, SPLS has been in investment mode & we think the pace of its spending will slow. It can still generate EPS of $1.10-$1.20 this year on its own, cushioning the downside," added the analsyt.

For an analyst ratings summary and ratings history on Staples, Inc. click here. For more ratings news on Staples, Inc. click here.

Shares of Staples, Inc. closed at $16.25 yesterday.

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