E Barnes & Noble, Inc. (BKS): Book It?

 

As the chief investment officer of a wealth management firm for nearly 20 years, I have found that success in investing comes when one remains disciplined and continuously searches for value, especially during difficult and volatile markets. Many investment professionals like myself believe the U.S. stock market is more than fairly valued. A number of large money managers believe the market is in a bubble as a result of the ultra accommodative posture of the Federal Reserve these last number of years. 

But when investors dig beneath the averages, they will find that stocks are not a monolith and that there are varying degrees of under/(over) valuation. So even in the current environment, I continue to find stocks that are potentially undervalued and that have limited downside risk. One stock that fits this approach is Barnes & Noble (BKS). 

The company reported weaker than expected sales in its fiscal first quarter, with comparable store sales down 6%. While operating earnings came in ahead of consensus estimates, the company still recorded a loss and is showing continued signs of struggle to stabilize its financial performance.

So Why the Optimism?

I am not betting that the company can turn itself around on a dime. Nor do I believe that sales and earnings are on the cusp of reaching an inflection point in the near term. But these are not reasons to avoid the stock. Some of the longer term fundamentals for the industry are improving and management has a number of strategic plans to drive higher traffic and sales. 

Positive #1 - Valuation

The stock is trading by many measures at distressed levels. The price-to-sales ratio according to Yahoo is hovering around 0.22. The enterprise value-to-EBITDA ratio based on the low end of management's guidance for fiscal year 2017 is approximately 4.5X. Both of these measures are well below the average for a retail stock.

Positive #2 - Dividend

With an annual dividend of $0.60, the yield is slightly over 5%, much higher than the average stock in the S&P 500 and quite compelling vis-a-vis the yields on most fixed income securities. Some might say that the high dividend is a sign of a potential value trap. However, the company's financial position is rock solid and the business has relatively modest capital needs. Unless sales take a turn for the worse, I see the dividend as safe.

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Jonathan Caplan 2 years ago Author's comment

Thank you all for your comments. One point I would like to make about the competitive threat of Amazon: Many predicted a few years ago that Best Buy was on its way to bankruptcy because of competitive pressure from Amazon. But the stock has since tripled as Best Buy made the necessary changes to its value proposition, despite the problem of "show-rooming." Barnes and Noble is in a similar situation. They must improve the customer experience and drive higher traffic. If management is successful, I think the stock could have a similar sharp rise in price.

Anastasija Janevska 9 months ago Member's comment

Any updates on this?

Corey Gaber 2 years ago Member's comment

Excellent point on the comparison between $BKS and $BBY.

Bruce Powers 2 years ago Member's comment

#Amazon started out as a book seller only. It's growth exploded once the company diversified. Why doesn't B&N do that also? Additionally, I believe I heard that Amazon is going to open brick and mortar stores, won't that be a major threat to B&N? $BKS $AMZN

Doug Morris 2 years ago Member's comment

Amazon brick and mortar stores? Cool! Where did you hear that?

Dan Jackson 2 years ago Member's comment

I heard that too, but I think they are supposed to be more like Apple Stores - specifically to sell their hardware like Amazon tablets, Amazon TV, Amazon phones, etc. Not books. So as the author said, that give B&N and edge. $BKS $AMZN $AAPL

Ayelet Wolf 2 years ago Member's comment

That's an excellent point Jonathan Caplan, a very similar situation indeed. And the fact that B&N was the only major book seller to survive should only strengthen the company $BKS $AMZN.

James Goldstein 2 years ago Member's comment

The question is can investors make money on $BKS right now and I believe the author made his case that the answer is yes.

Dick Kaplan 2 years ago Member's comment

Yes, some good points here worth digesting. I agree with Mitch Reynolds that B&N will never be the next #Amazon $AMZN. But that just gives credence to Jonathan Caplan's case that $BKS may be getting overlooked and could be an undervalued stock. I'll be giving it a deeper look.

Mitch Reynolds 2 years ago Member's comment

I just don't see how $BKS can ever hope to compete with power houses such as #Amazon. Barnes & Noble has much higher costs due to having to maintain brick and mortar stores. And now that $AMZN is offering same day delivery on many items, they are eating away at one of the few competitive advantages that $BKS could offer - getting items right away.

Ayelet Wolf 2 years ago Member's comment

I'd say that benefit is overrated. The biggest advantage #Amazon had over #BarnesandNoble was no sales tax. That benefit is now gone in most states. B&N is now correctly adjusting its strategy and focusing on the areas it can have a competitive edge -namely it's atmosphere.

Mike Nolan 2 years ago Member's comment

That's a valid point Mitch. I have some friends who go to Barnes & Noble to peruse books, then order them from #Amazon right from their mobile devices, and get that same book later in the day. $BKS $AMZN