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BBBY – Battle around applying the appropriate earnings growth rate

June 24, 2014 | About:

Harney246

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BBBY – Battle around applying the appropriate earnings growth rate

Retailer Bed Bath & Beyond is announcing earnings Wednesday, June 25th after the close. As a result of this meeting, the market will receive another data point to estimate BBBY’s appropriate earnings growth rate. Currently, the GuruFocus’ Reverse DCF calculator shows the market is valuing BBBY at a 7.72% growth rate while the DCF model using a history average is showing a 13.2% growth rate, giving a value of $87.07.

Pro’s:

  • This is a well-managed company by all the standard ratios, and it appears to have an economic moat with earning's growth of 13.20% for 10 years and 20.50% for 5 years.
  • No long-term debt
  • The company has been repurchasing shares.
  • The cash conversation cycle has improved approximately 10 days from 86.9 in 2013 to 77.6 2014.
    • Old School Value, BBBY, Liquidity Ratios
  • EV/EBITDA is cheap at 6.63 TTM.

Con’s

  • Inventory turnover slowed from 2.88 in 2013 to 2.69 TTM.
    • Old School Value, BBBY, Liquidity Ratios, Inventory Turnover.
  • In hunting through the GuruFocus expert list, the stock has mild hedge fund support with the no guru’s appearing to owning a position greater than 1% of the stock.

Other:

  • Charts –
    • The stock is trading at the low end of a linear regression channel drawn from the 2009 lows (Monthly chart, using a standard deviation of 3.)
      • This reflects BBBY stock price has auctioned down to attract buying support.
    • Although the stock has trended down from $80 since January 2014, it appears the stock is finding buying support around $60.
  • Options:
    • According to Interactive Brokers, BBBY option panel, BBBY stock has a historical volatility of 14.24%, while the implied volatility of the June 27th 60 calls is approximately 90%
    • Using implied volatility, the options market is predicting BBBY will range between a low of $56.07 and $66.03. (1 standard deviation).

Conclusion:

For investors interested in purchasing stocks qualifying under GuruFocus’ Buffett Munger screen, BBBY qualifies, and it offers an opportunity to purchase a company with an economic moat. It appears that the pro’s outweigh the con’s in purchasing this stock. In viewing the monthly chart, the stock is at an inflection point around $61.

Disclosures:

This is not a recommendation for anyone to buy or sell BBBY. Every investor has different risk tolerances and should consult their own advisor and/or use their best judgment.

For my retirement account, I sold a June 27th 57 put at .49 cents as I am willing to own BBBY at $57 given my risk tolerance.

About the author:

Harney246
CBOE Member 1989 to 2000.
Private investor

Rating: 4.0/5 (1 vote)

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