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SAMPLE OF INITIAL FUNDAMENTAL ANALYSIS
FOR TARPON FUND HOLDINGS
OFFICE DEPOT (ODP)
NOVEMBER 2008
PREPARED BY CALE SMITH
www.islainvest.com
• P.O. Box 1133 Islamorada FL 33036 * (305) 522-1333
SPREADSHEET NOTES
INTRO TO THE SPREADSHEET
The following is an example of the type of initial fundamental analysis we do on
companies when determining whether or not to add them to the Tarpon Fund. In this
instance, we took an initial look at Office Depot (ODP), and the enclosed analysis
supported our belief that the company, in November of 2008, was trading at extremely
low levels based on what the company was likely worth in a more normalized economic
period.
You’ll note we emphasize the following in our initial financial analysis:
 Returns on invested capital;
 Owners’ earnings (as opposed to unadjusted profits);
 Long-term cash flows of the business.
In the end, however, we did not add shares of Office Depot to the Tarpon Fund. While a
decent business trading at a very low valuation, and run by a management team we
generally admire, we want to see a much stronger moat around a business prior to
investing in it. In other words, the company’s competitive position is weak, and both
Staples and (to a lesser extent) Office Max represent threats to the return on our own
capital.
Not all businesses in the Tarpon Fund will possess unassailable barriers to entry. Some
companies may simply be too cheap to overlook. In a different period, Office Depot may
find its way into the Tarpon Fund, and the time we spent to better understand the
company now may ultimately prove profitable then. But in late 2008, we are finding even
better opportunities among much stronger companies.
Please contact us anytime to further discuss any of the above.
 csmith@islainvest.com
 (305) 522-1333
You can sign up for our newsletter and learn more about the Tarpon Fund at
www.islainvest.com. Nothing herein should be viewed as a recommendation.
The preliminary Office Depot analysis follows.
Islamorada Investment Management • www.islainvest.com
2
Office Depot (ODP) Analysis
Islamorada Investment Management
Closing price on 11/10/08 of $2.47
$USD in Mil.
1998
Owners Earnings Data
Net Income
Depr & Amort
Deferred Taxes
Adjustments in WC
Work Cap (Avg)
WC/Sales
WC Investment
Non-cash Charges
Effect of acctg change
Charges - Invty/AR
Earnings - invest
Loss (gain) - securities
Loss (gain) PP&E
Impaired assets
Other
Historical Financial Data
2002
2003
1999
2000
2001
$8,998
$233
-
$10,263
14%
$258
10%
$11,570
13%
$49
-81%
$11,154
-4%
$201
308%
$11,357
2%
$312
55%
$ 2,780
4,113
$ 1,528
1,028
431
70
$ 255
705
450
228
2,029
11.1%
$ 2,631
4,276
$ 1,694
1,239
415
40
$
219
513
240
1,908
11.0%
$ 2,699
4,196
$ 1,755
1,137
581
37
$
152
578
220
1,601
2.2%
$ 2,806
4,332
$ 1,783
1,061
613
109
$
6
563
558
250
1,848
8.8%
$
$
$
$
Income Statement Data
Revenues
Growth
After-tax Op. Income
Growth
Balance Sheet Data
Current Assets
Total Assets
NIB Current Liabilities
Accounts Payable
Accruals
Taxes Payable
Excess Cash
Cash
5% of Revenues
Goodwill & Intangibles
Shareholder Equity
ROIC
Cale Smith
233
6
(38)
258
169
(0)
49
206
(82)
201
199
0
2004
2005
2006
2007
$12,359
9%
$302
-3%
$13,565
10%
$336
11%
$14,279
5%
$274
-18%
$15,011
5%
$516
88%
$15,528
3%
$396
-23%
$ 3,210
4,757
$ 1,976
1,174
663
139
$
877
568
258
2,297
12.3%
$ 3,577
6,145
$ 2,264
1,323
809
132
$ 173
791
618
1,004
2,794
11.2%
$ 3,916
6,767
$ 2,603
1,650
820
133
$ 115
794
678
1,050
3,223
11.2%
$ 3,530
6,099
$ 2,422
1,324
980
118
$
703
714
881
2,739
9.8%
$ 3,455
6,570
$ 2,922
1,562
1,225
136
$
174
751
1,199
2,610
21.1%
$ 3,716
7,257
$ 2,766
1,591
1,171
4
$
223
776
1,390
3,084
12.8%
$
$
$
$
$
$
311
201
(10)
276
248
33
336
269
11
274
268
(110)
516
279
(8)
396
281
(1)
618
6.9%
-
633
6.2%
-
756
6.5%
-
626
5.6%
-
408
3.6%
-
439
3.6%
-
520
3.8%
-
462
3.2%
14
383
2.5%
(90)
543
3.5%
62
100
15
2
46
24
146
(2)
10
14
25
121
(9)
(12)
11
114
26
109
(11)
14
(5)
44
5
93
(9)
3
2
12
27
25.9
118
(11)
8
7
27
17
88
(16)
(3)
25
(4)
92
(23)
(8)
181
60
86
(27)
(24)
8
38
110
(35)
(25)
41
Capex Data
# of Stores - OSS N.A.
Change
# of Stores - OSS Int'l
Change
Reported Capex
Change in Capex
Maint Capex Per Store
Maintenance Capex
Owner Earnings
YOY OE Growth
Average Growth in OE
702
100
87
48
255
98
0.275
166
$ 223
17.2%
825
123
118
31
396
141
0.275
217
$ 402
81%
2008
2009
821
(4)
132
14
268
(128)
0.275
259
$ 164
-59%
857
36
144
12
207
(60)
0.275
262
$ 294
79%
867
10
173
29
202
(5)
0.275
275
$ 354
20%
900
33
64
(109)
212
10
0.275
286
$ 464
31%
984
84
78
14
391
179
0.275
265
$ 440
-5%
1047
63
70
(8)
261
(130)
0.275
292
$ 455
4%
1158
111
125
55
343
83
0.275
307
$ 470
3%
1222
64
148
23
461
117
0.275
353
$ 476
1%
2016
2017
Projected Financial Data - 2 Stage Discounted Cash Flow Model
Owner Earnings
Growth Rate
EOY Owners Earnings
Discount Rate (11%)
Present Value of Cash Flow
$476
0.08
$514
0.901
$463
$514
0.08
$555
0.812
$451
Sum of PV of Annual Owners Earnings
4,106
Calculation of Terminal Value
Cash Flow in year 10
Growth rate
Owner Earnings in year 11
Cap rate
Terminal Value end of yr 10
PV factor at end of yr 10
PV of Terminal Value
Intrinsic Value of Company
Market Value of Company
Margin of Safety
Shares Outstanding
Intrinsic Value per Share
Market Price per Share
2010
$555
0.08
$599
0.731
$438
2011
$599
0.08
$647
0.659
$427
2012
$647
0.08
$699
0.593
$415
2013
$699
0.08
$755
0.535
$404
2014
2015
$755
0.08
$816
0.482
$393
$816
0.08
$881
0.434
$382
Intrinsic Value versus Current Market Value
$40.00
362
0.03
372
0.08
4,656
0.352
$31.29
$30.00
Intrinsic Value per Share
1,639
8,635
3,270
62%
275,940,000
$31.29
$2.47
Questions? Cale Smith, Islamorada Investment Management.
$20.00
Market Price per Share
$10.00
$2.47
$0.00
csmith@islainvest.com
$881
0.08
$951
0.391
$372
$951
0.08
$1,027
0.352
$362