Banking on Barnes & Noble (BKS)
It can be interesting to look to the darlings of a sector for guidance as to which sectors have favorable prospects, but then to spend time thinking about and analyzing the laggards in the sector for actual buying opportunities. Being a contrarian leaves room to make money through capital appreciation whereas buying the all-stars may leave the investor vulnerable to overpayment. An investor who bought Wal-Mart (WMT) 10 years ago has actually lost money, even though the company itself has performed remarkably well. The growth prospects were all priced into the shares back then and the company would have had to exceed already optimistic earnings expectations for the performance to be translated into share price appreciation.
Amazon (AMZN), the apparent darling in the book merchant space, is trading on extremely high multiples (P/E of approx. 60 vs BKS’ of approx. 14) as a result of high hopes for growth in the electronic segment of the market, sales of physical books via the web store as well as electronic books via the Kindle e-reader. These expectations are obvious and are likely already priced into the company’s shares as a result. Of the 32 analysts who cover the company, 13 have a buy rating and only 2 recommend selling it. It’s hard to imagine much movement in share price if the company merely meets expectations, and not so hard to imagine what could happen if the company misses these expectations to the downside.
BKS on the other hand used to be the largest player in the book market but has since fallen out of favor with the market as its base of operations is largely the company’s 800 bricks and mortar stores. The share price is currently less than half of what it was in 2006, and as mentioned, has dropped significantly even within the past two weeks. It’s hard to see where the positive aspects of the company’s outlook are priced in, if they are. Another benefit for investors of the depressed share price is the current dividend yield of almost 5%. As brought to my attention via the Wall Street Journal is the fact that BKS will actually be partaking in the growth of the e-book market right alongside AMZN. BKS may even have an advantage thanks to its bricks and mortar locations as many shoppers have never even seen an e-reader, and a physical location gives BKS the opportunity of putting these devices directly in the hands of the consumer. Even more interesting is that while AMZN’s e-reader operates on a closed format (only the Kindle can read titles purchased from AMZN), the books sold by BKS operate on a shared platform known as ePub which will allow the purchases to be read on any device including laptops. BKS has already begun taking steps to compete with AMZN as it has acquired an independent e-book seller and will also be launching its own e-book store shortly.
Based on the fundamentals discussed here, BKS seems to be a compelling value play. As always though it is important to arrive at an estimate of intrinsic value so that a purchase decision is based on hard evidence of a discount as well as the incorporation of a margin of safety. I’ll be valuing BKS in the next couple of days as well as taking a closer look into the financial statements and management’s discussion and analysis. I will be sure to share my findings here with the community. Until then, let’s take this to the forums for some discussion!