Quality businesses aren’t impervious to the odd hiccup but a few glasses of water usually fixes the problem. Less impressive companies are inclined to choke. But Corporate Express, Australia’s largest distributor of office supplies to business, is not a choker.

The company’s stock has been out of favour for a little while now, with sales growth slowing and cost pressures evident. But these are hiccups rather than terminal problems, which is why we upgraded the stock in issue 205/Aug 06 (Long Term Buy—$5.75). The very next day it reported a slowdown in sales growth and, with the share price falling 15%, we reinforced our view of issue 206/Aug 06 (Long Term Buy—$4.88).

While it’s too early to call a turnaround, Corporate Express shares have a pleasing habit of rebounding from bad news. And the recent third quarter report provides cause for cautious optimism. Third quarter sales rose 6% to $315m while earnings before interest and tax rose by about the same amount, to $25.4m, with the company shaking off the recent trend of costs rising faster than sales. While one quarter doesn’t make for a recovery, it is evidence that the business efficiency program established by MD Grant Harrod is having an effect. The IT products business, a recent problem area, has also seen some sales recovery.

In other news, Corporate Express also announced that it would lift its dividend payout ratio to 65% from 50% and is planning a $50m off-market buyback. While the brokers will claim these moves are evidence of the company being ‘ex-growth’, we prefer to think of them as the sensible return of cash to shareholders.

The stock is up 13% since our last review and on a PER of 15 it doesn’t look expensive. LONG TERM BUY.

Disclosure: The author, James Greenhalgh, does not own shares in Corporate Express, although another staff member does.