At the end of February, I featured a retail store chain Bed Bath & Beyond Inc. (NASDAQ:BBBY) in my article, stating that it could be a decent stock for long-term investors at $57.70 per share. Last Saturday, Barron’s thought that its share price could fetch around $85 per share on a buyout deal. Since the beginning of this year, Bed Bath & Beyond has advanced by more than 9.2% to more than $61 per share. Here are the five reasons that investors could feel safe investing into Bed Bath & Beyond at its current price:
In the past ten years, Bed Bath & Beyond Inc. (NASDAQ:BBBY) has demonstrated a good growth in its revenue, EPS and its cash flow. Its revenue has grown from $3.67 billion in 2002 to $9.5 billion in 2011 while the EPS has risen from $1 to $4.06 during the same period. In addition, investors could consider this retailer chain operator to be a cash cow. While its operating cash flow tripled to $1.25 billion in the past ten years, its free cash flow also increased from $284 million in 2003 to $982 million in 2012. Thus, the revenue, EPS and free cash flow all experienced double digit annualized growth of 13%, 15% and 14.1% in a 10-year period, respectively.
No leverage employed in the operation
What makes me interested in any retailers is its conservative capital structure. With the strong balance sheet, retailers could weather short-term business headwinds without wiping out its equity portion. I feel comfortable with Bed Bath & Beyond Inc. (NASDAQ:BBBY) as it does not employ any debt in its operation. As of November 2012, it had nearly $4 billion in equity, $785 million in cash and short-term investments and no debt. The two biggest items in its liabilities were account payable of $1.1 billion and deferred revenues of $480 million. Moreover, in the past five years, the company has spent nearly $2.75 billion in share buybacks, reducing its share count from around 268 million to 244 million.
Operates like a private company
According to Barron’s, CEO Steve Temares and the two chairmen Eisenberg and Feinstein has run the company as if it were a private company. The company hosted no investor days and had limited disclosures of its financial statements. Even when Barron’s called for comments from the company, it didn’t return the calls. In addition, its retailing strategy is different from other big retailers’. Barron’s thought it provided excellent customer service but it seldom advertised. What surprises me is the fact that the retail often accepted expired discount coupons. Barron’s commented: “The approach works because many customers come for a single item and leave with many, as they walk around the “racetrack” layout of the narrow-aisled stores.”
The most profitable but the cheapest valued retailer
At around $63 per share, Bed Bath & Beyond Inc. (NASDAQ:BBBY) is worth around $13.5 billion on the market, the market is valuing the retailer at only 6.9 times EV/EBITDA. Compared to other big retailers such as Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT), Bed Bath & Beyond is the smallest and the cheapest company among the three. Target Corporation (NYSE:TGT), at $67 per share, has the total market cap of around $43 billion. It is valued around 8.12 times EV/EBITDA on the market. Wal-Mart is the biggest company among the three, with nearly $246 billion market cap. At around $74 per share, Wal-Mart Stores, Inc. (NYSE:WMT) is valued at 8 times EV/EBITDA. Interestingly, Bed Bath & Beyond Inc. (NASDAQ:BBBY) is the most profitable company, generating 16% operating margin while the operating margins of Wal-Mart Stores, Inc. (NYSE:WMT) and Target were only 6% and 7%, respectively. While Wal-Mart Stores, Inc. (NYSE:WMT) pays a 2.3% dividend yield to its shareholders, the dividend yield of Target Corporation (NYSE:TGT) is 2%. Bed Bath & Beyond Inc. (NASDAQ:BBBY) does not pay any dividends.
My Foolish take
With all those five reasons above, Bed Bath & Beyond Inc. (NASDAQ:BBBY) is still a buy. A buyout valuation of 10 times EV/EBITDA could value Bed Bath & Beyond at around $85-$88 per share, a 43% premium on its current share price.
The article This Retailer Could Receive a 40% Buyout Premium originally appeared on Fool.com and is written by Anh HOANG.
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