Stock, Paper, Scissors

In the world of office supplies, there are three main players -- Office Depot (NYSE:ODP), OfficeMax (NYSE:OMX), and Staples (NASDAQ:SPLS) -- but only one Foolish favorite.

Of the Big Three, Staples has the most stores (1,884) and the biggest sales (more than $18 billion). Office Max, meanwhile, has the most room to grow, with only 914 stores and about $9 billion in sales.

The competition for paper, pens, and printer cartridges is not limited to these specialty retailers. Warehouse retailer Costco (NASDAQ:COST) also caters to small businesses and home offices, and I'll admit to buying most of my supplies from Wal-Mart (NYSE:WMT). But these two giants don't offer the complete package of services, especially for larger businesses, that the three usual suspects do.

The community's thoughts
My cheapness radar went off when a recent Barron's article noted that Office Depot fell 25% from its 52-week high, making it seemingly inexpensive relative to its future prospects. But even though I love a good bargain, I'm also a skeptic by nature. I decided to check out our CAPS community's take on the leader of the office supply pack.

As you can see from the data above, it wasn't even close. The community likes Staples. And from the data I'll give you below, I'm inclined to follow the crowd this time.

My little view of the world
Given the confounding information from the press and the community, it was time to start over and develop my own ideas about the office supply giants. I started with this intriguing data from the last five years:

None of these companies is growing very fast, but they've each used their operating leverage and cost-cutting efforts to grow net income faster than sales. More importantly, only Staples has grown its free cash flow over that time period. Remember, EBITDA is not cash flow -- we must not only worry about working capital changes, but also remember to factor in the capital expenditures necessary to generate future cash flows. Growth isn't free.

I also wanted to test Office Depot's stated goal of creating shareholder value. That's encouraging to hear, but what does the data say? To find out, let's look at the returns on invested capital (ROIC):

Note that OfficeMax isn't creating value yet; its ROIC remains less than its cost of capital. I'd agree that Office Depot is creating value for its shareholders, but not as effectively as Staples, where ROIC is increasing even while the company grows. Maybe that one-two punch explains why the CAPS community is higher on Staples than its two main rivals.

Are these companies bargains today? I used my discounted cash flow tool to estimate the growth expectations built into today's stock prices.

The market isn't expecting much from Office Depot and OfficeMax: 8% and 7% growth over the next decade, respectively. I envision store openings and margin expansion driving that growth -- but neither company has been able to achieve anywhere near that rate over the last five years. That doesn't necessarily bode well for future growth, especially with a tough competitor like Staples working on its own expansion. Incidentally, the market expects 13% free cash flow growth over the next 10 years at Staples. Given its increasing ROIC, the company is likely to hit that goal.

The Foolish bottom line
Staples is the best operator in the business. Office Depot and OfficeMax still have some work to do to justify their prices, and the competition among all three will be fierce. I don't consider any of them a great bargain, but if you must invest in one, keep an eye on Staples -- and wait for a better price.

Costco is a Stock Advisor selection, and Wal-Mart is an Inside Value recommendation. Both market beating newsletters are available free for 30 days.

Retail editor David Meier is ranked 980 out of 27,038 in CAPS. He does not own shares in any of the companies mentioned. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.