Does BBBY’s low Price to Book Value point to big value - or big risk?

November 1, 2018

Does BBBY’s low Price to Book Value point to big value – or big risk?

Some of the first important metrics I learned about when I started studying fundamental and value analysis years ago revolved around identifying how much a stock should be worth versus what it’s current trading price really is. At its core, the principle is simple enough; if the stock is trading lower than what the value of the underlying business is, what you may be looking at is a terrific bargain opportunity. The question of how you identify what that value actually is where there is a lot of guesswork. Not all analysts or value-oriented investors rely on the same metrics, and so if you want to focus on investing in this way, you generally have to be willing to work on it on your own to figure what measurements make sense to you and provide reliable enough information to help you feel comfortable with the investing decisions you make, and the results they give you.

I’ve learned to rely pretty heavily on a stock’s Book Value. It’s not a perfect representation of what the value of a stock’s business – what I like to think of as its intrinsic value – may be, but it does a pretty good job of acting as a reasonable barometer. One of the reasons I like it is that none other than Warren Buffett himself likes to refer to Book Value as the per share price that shareholders can expect to be paid if the stock were suddenly forced to liquidate its assets, pay its remaining debts, and close the doors forever.



The thing about Book Value is that stocks that actually trade below their Book Value are usually pretty hard to find, except when the market has already been in an extended state of decline. Those kind of ideal values don’t generally tend to show up in increasing numbers until a long bear market reaches a bottom. Even with the volatility that the broad market has seen over the last month, which has driven the Dow and NASDAQ into correction territory, and the S&P 500 just a nudge away from it, we remain a very long way from the point where you can expect to see a lot of stocks trading at such major discounts. The fact is that when the market moves into bull market territory, most of those deeply discounted stocks rise very quickly with it. The longer a bull market lasts, the harder it becomes to find stocks at those kinds of deep discounts. That’s why I decided to start comparing a stock’s current Price/Book ratio to its historical average ratio; as the market ebbs and flows into the kinds of long-term upward trends that define a bull market, the stock can move into or out of discounted territory based on those averages on multiple occasions, and that can provide a lot of opportunities to keep taking advantage of value-based investing even when the market is at or near to historical highs.

It’s pretty natural for me, because of the way I rely on Book Value relative to a stock’s price, to sit up and take notice when I find a stock trading at a major discount versus its current Book Value. That’s what happened today when I decide to circle back to a stock that I haven’t evaluated in a couple of years, Bed Bath & Beyond (BBBY). At first glance, there are some elements that look pretty attractive from a fundamental standpoint, like healthy Free Cash Flow and a fat dividend. The fact that the stock is down over the last year by nearly 38% – and about 31% since the beginning of 2018 – is also something that makes the contrarian in me start paying attention. Even more interesting is that the stock decline since early July has pushed the stock down to levels relative to its Book Value that, taken by itself, should scream value. One of the other things I’ve learned about Book Value is that if you see a stock trading significantly below its Book Value when the rest of the market is still in bull market mode is that there is usually a dangerous reason for the stock’s discount. I think that is the case with BBBY, so if you want to work with this stock, you need to know what kind of risk you might really be taking.



Fundamental and Value Profile

Bed Bath & Beyond Inc. is a retailer, which operates under the names Bed Bath & Beyond (BBB), Christmas Tree Shops, Christmas Tree Shops andThat! or andThat! (collectively, CTS), Harmon or Harmon Face Values (collectively, Harmon), buybuy BABY (Baby) and World Market, Cost Plus World Market or Cost Plus (collectively, Cost Plus World Market). The Company operates in two segments: North American Retail and Institutional Sales. The Company sells a range of domestics merchandise and home furnishings. Domestics merchandise includes categories, such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories, such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and juvenile products. The Company operates approximately 1,530 stores plus its various Websites, other interactive platforms and distribution facilities. BBBY’s current market cap is $1.9 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings and sales growth were both negative, with earnings declining more than 52% and sales growth a little less than 1%. The last quarter did see positive growth in both areas, with earnings increasing 12.5% and sales growing by about 6.5%. If you compare the most recent trailing twelve months to the trailing twelve months prior, earnings growth has declined nearly 35%, which is another troubling indicator. The yearly declines point to concerns that become clearer when you look at the company’s Net Income versus Revenues. Over the last year, that number was only about 2.8%, but declined in the last quarter to about 1.55%. This is a company that was already operating with a razor-thin margin profile that is showing significant signs of deterioration.
  • Free Cash Flow: BBBY’s free cash flow is healthy, at a little over $750 million. This is a number that has increased significantly over the last year from about $450 million.
  • Debt to Equity: BBBY has a debt/equity ratio of .51. This is a low number that implies BBBY’s debt is manageable; but considering how narrow the company operating margins are, there is little room for any kind of error. As of the last quarter the company reported more than $1.4 billion in long-term debt; and while the fact they also reported a little more than $1 billion in cash and liquid asset over the period is a positive, their narrow margins strongly suggests they will have to use their available cash to service their debt. That could lead to significant liquidity problems not far down the road.
  • Dividend: BBBY pays an annual dividend of $.64 per share, which translates to an impressive yield of about 4.65% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BBBY is $21.02 and translates to a Price/Book ratio of .65 at the stock’s current price. Their historical average Price/Book ratio is 3.12, and provides a long term, top-end target price above $65 per share – a  level the stock hasn’t seen since mid-2015. That sounds pretty fantastic, but consider that BBBY is in the midst of a major overhaul of its basic business model, with management shifting the company’s focus away from big-box stores to a heavier emphasis on e-commerce. That should be a good thing, right? Well, it actually stands to make things significantly tougher as margins from online sales in practically every part of the retail sector are much narrower than in-store. When you add in the fact that BBBY is trying to survive in a world dominated by Amazon (AMZN) and Walmart (WMT), you may understand why many analysts are skeptical at least, and in many cases downright pessimistic about the company’s long-term success.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The stock’s downward slide from the beginning of the year is easy to see; over the last month, the decline has picked up speed, forcing the stock to new lows right around $13 per share. The last time the stock was this low? Spring 2000.
  • Near-term Keys: As morbid as it may sound, betting on a rebound in this stock right now is a lot like looking for the proverbial “dead cat bounce;” we might see it try to rally from its current levels, and even try to push near to its closest major resistance, which appears to be around $16.50 based on previous pivot activity. I don’t care whether you’re thinking about a short-term trade or a long-term position based on the stock’s amazing value proposition. I think this is a stock that could in real danger of dropping even further and leave any investors foolish enough to “give it a whirl” holding the bag.