Last week, Corporate Express (CXP) reported earnings for the six months to June 30. While the result was a sound one, it was largely within market expectations. Net profit before tax increased 5.5 percent while the recently completed share buyback resulted in an increase of earnings per share by 10 percent on the same period last year.

Profit margins expanded slightly from increased sales of higher margin products but persistent cost pressures limited further gains. The company's EBITDA (earnings before interest, tax, depreciation and amortisation) margin expanded from 9.1 to 9.4 percent, towards the top end of management's long-term target of 9 to 9.5 percent.

Having looked through the result in detail, we are of the view that CXP's organic growth potential is not as favourable as we first anticipated. CXP will no doubt continue to grow, but with competitive pressures and the ever-present threat of rising costs, we think further margin expansion will be difficult from here.

The company has the balance sheet capacity to fund a major acquisition in order to drive growth, but we perceive this as unlikely. In the past, CXP has shown a preference for smaller acquisitions to complement the existing business model.

Giving some credence to this lower growth outlook, CXP increased its dividend payout ratio from 50 percent to 65 percent. We interpret this move as a reflection of the limited growth options the company has to deploy their retained earnings for profitable re-investment.

Consensus Valuation Estimates

The increase in payout ratio resulted in CXP declaring a fully franked dividend of 13.5 cents, to be paid in October. Based on Bloomberg consensus estimates, CXP now trades on a dividend yield of around 4.2 percent.

This increase places the stock on a lower growth footing (this is because CXP will now distribute a greater amount of earnings to shareholders instead of retaining them on the balance sheet).

Given our expectations of lower future growth, and the fact that CXP trades on 15 times earnings - we think it's time to take profits on the stock.

We initially bought CXP in May 2006 at around $6. Our call was slightly premature, and the stock subsequently fell. We believed the fall was overdone and between August 2006 and May 2007, CXP recovered all the lost ground and more, rallying more than 60 percent. It is hardly surprising that the upward trend subsequently paused for several months to consolidate these substantial gains.

While a pause for consolidation is a normal part of the price cycle for any stock following strong gains, from a charting perspective, CXP's outlook is deteriorating. During the past week, prices broke below support at $6.45 to touch a low of $6.30.

Taking into account the weak near-term chart structure and our view of a lower rate of future profit growth, we believe there are better opportunities elsewhere and therefore recommend taking profits on CXP.

Accordingly Fat Prophets recommends selling Corporate Express around $6.37.

Note: From a share price perspective, CXP may receive a boost in September despite the risk of slowing growth. The company's European parent, who owns around 60 percent, is conducting a strategic review and may decide to take full ownership by offering to buy out minority shareholders. Such a scenario is by no means certain, however.