IKN: I Think IKON

My latest column is up at RealMoney.

Ikon Office Solutions (IKN) was recently upgraded to buy by TheStreet.com Ratings, and as I look at the fundamentals, it isn’t hard to see why.

As the world’s largest independent channel for document management systems and services, Ikon enables customers worldwide to improve document workflow and increase efficiency. Ikon integrates best-in-class copiers, printers and multifunction product technologies from manufacturers such as Canon (CAJ) , Ricoh, Konica Minolta and Hewlett-Packard (HPQ - Annual Report) with document management software from companies such as Captaris (CAPA) , Kofax, eCopy, Electronics for Imaging (EFII) , EMC Documentum (EMC - Annual Report) and others.

Ikon is trading at just 0.78 times book value, well below the industry average of 1.39 times. Although much of that book value is represented by intangible assets, the same can be said of many companies in the industry. Xerox (XRX) , for example, has nearly half of its book value represented by goodwill. For Pitney Bowes (PBI) , it is more than 100%.

Meanwhile, analysts expect Ikon to grow 12% annually over the next three to five years. This estimate is exactly in line with the average growth rate expected for the industry. I don’t see why a stock growing at the same rate as the industry should trade at half the industry’s price/book multiple — especially when its free cash flow is so strong. I believe the valuation should expand to the industry average. If the price/book multiple can expand to the industry average over the next five years, then even if the company only manages to grow at the 8.6% rate forecast by the Street’s most conservative analysts, the total return could exceed 20% annually.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

William Trent currently has a short position in put options related to Office Depot (ODP).