An Easy Trade as Takeover Offers Pile in for Barnes & Noble

Yet it's clear that the business is quite undervalued on an enterprise value-to-sales basis (EV/Sales), sporting the lowest ratio. (EV/Sales is a handy measure of what each dollar of a company's sales is worth to investors.) Of those five stocks listed here,Best Buy (NYSE: BBY) actually appears to be the best value thanks to a combination of decent operating margins and a still-low EV/sales ratio. For Home Depot, the measure is fairly high, which partially reflects strong profit margins and also anticipates an eventual strong sales rebound when the housing sector turns up. No such upturn is expected for Barnes & Noble.

To be sure, all of these retailers are trading at somewhat depressed levels relative to historical norms. When the economy is again on firm footing, these EV/sales ratios may all move above 1.0. In that context, potential acquirers of Barnes & Noble may be looking ahead to the days when the entire pack is in better favor. But these potential buyers have their work cut out for them. They'll need to either boost sales at each store -- perhaps expanding the line of goods sold beyond books and music, or they'll have to take a hatchet to the company's cost structure to return it to profitability.

Barnes & Noble founder Len Riggio has made it clear that he still thinks this is a richly-valued asset. He has allegedly previously rebuffed a $25 a share offer from Mr. Burkle in 2009. It's unlikely that any future bids would be at or above that mark -- especially as the company's sales and profit outlook have weakened over the course of 2010.

Action to Take --> Shares have likely found a floor here, now that Barnes & Noble is in play. The shares could move past the $20 mark as the buyout rumors begin to swirl, so this might be a nice short-term trade ahead of a presumed bidding contest that is set to begin in October. But you shouldn't expect massive gains, and if shares move into the low $20s, you should book profits and move on.





-- David Sterman

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David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More...