In my last post I explained why Malone selling most of his Barnes & Noble preferred shares did not really affect the bull case for $BKS. But what about valuation? What is $BKS worth?
I think it’s safe to say that even bulls understand that $BKS’s revenues are in a secular decline, and that it does not deserve to trade at similar multiples to that of more stable or growing companies. It does not mean however that the company is worthless. There are many companies that run their business for its cash flows and since they pay out substantial dividends and buyback significant amounts of shares, their stock not only provide investors with solid income, but capital appreciation as well.
A good example of what the $BKS bull case will look like is $GME. There are many similarities between the two. They both operate in retail businesses that according to conventional wisdom will not be around come this time next decade. Similar to $BKS, $GME has been one of the most shorted stocks in the market over the last several years, with an extremely simple and common short thesis.
Yet $GME has doubled in the last couple of years (at one point almost quadrupling off its lows), while $BKS (while it had some impressive short term swings) is at the same basic level for the last 5 years.
The biggest difference between the two is what they did with the cash from their cash cow businesses. $GME initiated an $.80 div in 2012 and increased it twice since. They have also repurchased ~$950M worth of shares since 2011.
(Another example is $GRMN, who just hit a 6 year high today. The company’s revenues peaked in 2008 at $3.5B and have declined 25% since. But gross profits and net income have been really stable while the company bought back lots of stock and have a handsome dividend.)
$BKS on the other hand used their cash flow to invest in the Nook.
In the 52 weeks ending 4/28/12 $BKS ex Nook had $440M of EBITDA while Nook lost $262M. The following year $BKS ex Nook did over $487M while Nook lost $480M. If $BKS would have instead taken that money and used it to pay a nice dividend and bought back some stock, I think it’s safe to assume their shares would be trading considerably higher.
$GME currently trades at an Enterprise Value of ~5.25 times their EBITDA. They have a 3.33% dividend yield and still have over $400M remaining on their share buyback plan.
I don’t have any strong opinion on $GME at its current valuation, but now that $BKS’s Board of Directors approved a plan to “rationalize its NOOK business”, the bull case’s path is one that $GME traveled over these last couple of years.
My base case is $BKS cutting Nook EBITDA losses to $35M/quarter. (The last three quarters have averaged $54M in EBITDA losses.) I estimate total company EBITDA to be in the neighborhood of $300M/Year.
Once the company stabilizes the Nook business, I expect them to initiate a substantial dividend and buyback policy. If similar to $GME’s there is no reason the company can’t trade at a similar multiple to $GME which would equate to $26.85 per share.
It would be tremendously accretive if $BKS can succeed in purchasing significant amounts of stock prior to the stock trading up to those multiplies, and in that case I believe we can see the stock trading well into the $30s. ($GME repurchased almost $700M or 25% of their current shares at an average cost of $20-$21 per share back in 2011-2012.)
There are a couple of other possible bull case scenarios, but they have recently become less probable. If the company can sell or spin off Nook Media (which includes their College business) then not only will it not drag the valuation down, it can actually provide cash for the remaining Retail business. Based on my SOTP analysis, such scenarios get me to a minimum of $30 per share.