“Sum-of-the-Parts” Value?
Shares of Barnes & Noble, Inc. (NYSE:BKS) were recently trading higher by 7.50% to erase last week’s loss following false acquisition rumors. The gains are due to a weekend article from Barron’s where the firm argues that BKS is presenting “sum-of-the-parts” value. Barron’s provides reasons to buy the stock, which center around its belief that the company’s book business combined with Nook Media are worth much more than its current valuation.
As an investor, I often argue the same points for a variety of companies, and that argument centers around companies that have significant revenue relative to market capitalization. In the case of Barnes & Noble, Inc. (NYSE:BKS), it has a market cap of $1.27 billion and sales of almost $7 billion, making Barron’s case accurate. The question is whether Barnes & Noble, Inc. (NYSE:BKS) has something that someone else wants. While there may be value to Nook, or some of its core assets, I don’t like investing in a company on the speculation of a takeover. Hence with 9% revenue declines, I would avoid this stock after its recent rally.
A 100% Premium Worth Exploring
Shares of Tesoro Corporation (NYSE:TSO) are currently trading with gains of almost 4% after Barclays raised its price target to $120, a near 100% premium on its current price. While the price target may appear excessive, Barclays defends it by reflecting the inclusion of the BP Carson, California refinery and its assets into earnings estimates. The firm states that it’s “impressed by management’s well-executed strategy and approach given the difficult regulatory approval process in California.”
The problem with valuing Tesoro Corporation (NYSE:TSO) is that we don’t know the precise value of its new assets. However, when we look at its current valuation, it is hard not to agree with Barclays. The company has growth of almost 4% (exceeding the S&P 500) and trades at just 0.26 times sales with a P/E ratio of 11.50. Thus Tesoro Corporation (NYSE:TSO) is cheap, and if we double its market cap then it’s still cheap, below the S&P 500 average. As a result, with the new assets, I can say that Tesoro Corporation (NYSE:TSO) is in fact a “buy.”
Be Patient With this High Flyer
3D Systems Corporation (NYSE:DDD) rallied almost 5% on Monday after Needham and Maxim raised their price targets with bullish notes. Needham raised its price target to $52 from $42 and specifically cites acquisitions, a successful follow-on offering, and industry strength. The firm mentions recent acquisitions Rapidform and Geomagic as two that should provide high-margin revenue streams. Needham essentially believes that 3D Systems Corporation (NYSE:DDD) is best positioned in a growing space, with great operating leverage and upside earnings potential.
Personally, I am a big fan of the 3D printing space, and 3D Systems Corporation (NYSE:DDD) is without question my favorite. The only problem is its valuation, as the stock trades at 11.50 times sales and at 38 times next year’s earnings. With that said, I have to agree that 3D Systems Corporation (NYSE:DDD) has a lot in its favor, and could very well continue to trade higher. However, as a value investor, I prefer to be patient, and wait for a pullback or for fundamentals to more closely compare to its valuation.
Conclusion
In my book Taking Charge With Value Investing (McGraw-Hill, 2013) I explain that analyst calls can offer a great buying opportunity. Sometimes they can educate you on an under-the-radar company, and when they provide new information from surveys or channel checks then it almost always indicates a “buy.” However, you have to be careful with those that “follow-the-leader” and are issuing upgrades simply to meet the needs of their asset management division or to maintain balance between themselves and other large name firms. When it’s all said and done, you have to view them with a bit of skepticism, but respect nonetheless; and those that are good use as an opportunity.
The article Monday’s Market-Moving Upgrades Worth Noting originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends 3D Systems. The Motley Fool owns shares of 3D Systems and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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