Many investors view spinoffs as a potential to buy cheap stocks. Often times, investors will sell the spun off company because they don’t understand it. Another reason is that mutual funds may sell if it doesn’t fit their charter. For example, a large cap mutual fund may dump a spun off company because it no longer meets the market capitalization requirements. Today, Barnes & Noble spun off its college education division and formed Barnes & Noble Education, Inc. (BNED, Financial). BNED dropped 8% today so I took a peek to see if the company was cheap.
Business and Industry
From the company’s Form S-1 Registration Statements:
Barnes & Noble Education, Inc. (BNED, Financial) operates bookstores on college and university campuses throughout the United States. The company’s revenues come from selling/renting physical and digital textbooks as well as selling other general merchandise (clothing, school gear, supplies, etc.). The company operates over 724 stores nationwide, which reach ~23% of the U.S. total enrolled college and university student populations. BNED establishes multi-year management agreements with schools for the right to operate campus bookstores. In turn, the company pays the schools regular payments “representing a percentage of sales and, in some cases, includes a minimum fixed guarantee.” The industry is highly fragmented. Their competitors include Amazon (AMZN, Financial), Chegg (CHGG, Financial), Follett Corporation, as well as other companies with apps on the Google (GOOG, Financial) (GOOGL, Financial) Play and the Apple (AAPL, Financial) iTunes stores.
The image below shows some of BNED’s partners
BNED’s Financials
| (In thousands of dollars) | Â | Â | Â | Â | Â |
| STATEMENT OF OPERATIONS DATA: | 2015 | 2014 | 2013 | 2012 | 2011 |
| Total sales | 1,772,998 | 1,747,922 | 1,763,247 | 1,743,175 | 1,778,159 |
| Y-o-Y Growth | 1.43% | -0.87% | 1.15% | -1.97% | 113.30% |
| Â | Â | Â | Â | Â | Â |
| Total cost of sales and occupancy | 1,329,425 | 1,311,157 | 1,358,631 | 1,348,737 | 1,399,119 |
| Â | Â | Â | Â | Â | Â |
| Gross profit | 443,573 | 436,765 | 404,616 | 394,438 | 379,040 |
| Gross profit % | 25.02% | 24.99% | 22.95% | 22.63% | 21.32% |
| Â | Â | Â | Â | Â | Â |
| Selling and administrative expenses | 359,504 | 330,426 | 302,902 | 283,215 | 287,851 |
| Depreciation and amortization | 50,509 | 48,014 | 46,849 | 45,343 | 43,148 |
| Â | Â | Â | Â | Â | Â |
| Operating profit (loss) | 33,560 | 58,325 | 54,865 | 65,880 | 48,041 |
| Interest expense, net | 210 | 385 | 4,871 | 5,684 | 10,576 |
| Â | Â | Â | Â | Â | Â |
| Earnings (loss) before taxes | 33,350 | 57,940 | 49,994 | 60,196 | 37,465 |
| Income taxes | 14,218 | 22,834 | 19,820 | 23,771 | 14,799 |
| Â | Â | Â | Â | Â | Â |
| Net earnings (loss) | 19,132 | 35,106 | 30,174 | 36,425 | 22,666 |
| Y-o-Y Growth | -45.50% | 16.35% | -17.16% | 60.70% | Â |
| Â | Â | Â | Â | Â | Â |
| Total Assets | 1,129,924 | 1,143,760 | 1,026,460 | 974,858 | 1,185,055 |
| Total Liabilities | 339,796 | 719,222 | 697,565 | 302,323 | 280,861 |
| Total Debt | Â | Â | Â | Â | Â |
| Total Equity | 790,128 | 424,538 | 328,895 | 672,535 | 904,194 |
| Â | Â | Â | Â | Â | Â |
| Return on Equity | 2.42% | 8.27% | 9.17% | 5.42% | 2.51% |
| # of Stores | 725 | 700 | 686 | 647 | 636 |
| EPS | $0.33 | $0.88 | $0.78 | $0.99 | $0.63 |
- At today’s closing price of $13.19, the trailing PE ratio is 40.
- Let’s do a quick and dirty approximation of normalized earnings. If you average out their EPS over the last five years it comes to $0.72. Applying multiples of 10 to 18, you get a range from $7.20/share to $12.96/share.
- The company does not deserve a high multiple of 18 based on their low Return on Equity, anemic revenue growth, and unpredictable earnings. A multiple of 12 is more appropriate.
- The company offers a commodity product and customers are highly price sensitive.
- They listed their Yuzu app as one of the reasons that their SG&A went up last year. The app allows readers to organize and annotate their digital textbooks. When I checked the Itunes store, the app received low ratings.
- For FY15, they opened a net of 25 new stores but their revenue remained flat (FY 2015 had 53 weeks vs. 52 weeks for FY 2014).
Conclusion
- On its first day of trading BNED fell over 8%
- BNED is an average company which sells a commodity product.
- In addition to being in a highly fragmented, competitive industry, I wonder about piracy risk.
- Another trend hitting colleges are online lecture videos. I watched a series of video lectures from Wharton and I can say that it was far superior to any textbook that I ever read. The powerpoint like animations made topics much easier to understand.
- I believe this stock deserves a lower valuation and its stock price could head lower.
