Bed Bath & Beyond Inc. (NASDAQ:BBBY) has been a good stock for its shareholders, rising more than 35.2% and beating the S&P 500’s return of nearly 17.90%. Recently, the company has reported increasing revenue but lower profits in the first quarter of 2013. Famous investors Jim Simons, Chuck Royce and Scott Black have Bed Bath & Beyond Inc. (NASDAQ:BBBY) in their investment portfolios. Should investors come in the company at its current trading price? Let’s take a closer look.
Higher revenue but lower earnings
What I like about Bed Bath & Beyond Inc. (NASDAQ:BBBY) is its strong capital structure. As of June 2013, it had more than $4 billion in equity, $921.8 million in both cash and short-term investments, and no debt. The deferred rent and other liabilities came in at $493.7 million. Bed Bath & Beyond Inc. (NASDAQ:BBBY) is trading at around $75.60 per share, with a total market cap of $16.5 billion. The market values the company at only 8.5 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization.)
Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT) experienced not-so-impressive first quarter earnings
Compared to peers such as Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT), Bed Bath & Beyond seems to be the most expensively-valued among the three.
Target Corporation (NYSE:TGT) is trading at $72.60 per share, with a total market cap of $46.60 billion. The market values Target Corporation (NYSE:TGT) at a lower valuation than Bed Bath & Beyond, at 7.7 times its trailing EBITDA. In the first quarter, both Target Corporation (NYSE:TGT)’s net income and revenue declined. While the revenue came in at $16.7 billion, the net income was only $498 million, or $0.77 per share, 28% lower than the net income of $697 million, or $1.04 per share in the first quarter last year. For the full year, it is expected to generate around $4.12 to $4.32 in EPS.
Wal-Mart Stores, Inc. (NYSE:WMT) also has a lower valuation than Bed Bath & Beyond. Wal-Mart Stores, Inc. (NYSE:WMT) is trading $77.20 per share, with the total market cap of $253 billion. The market values Wal-Mart Stores, Inc. (NYSE:WMT) at 8.3 times its trailing EBITDA. In the first quarter this year, Wal-Mart Stores, Inc. (NYSE:WMT) did not produce impressive operating results. Revenue increased by only around 1% to $114.19 billion, while the net income climbed up only 1.1% $3.78 billion. However, its earnings per share experienced a much higher growth, at 4.5%, than net income, to arrive at $1.15. This earnings per share growth was mainly due to its share repurchases in the first quarter. During the quarter, Wal-Mart Stores, Inc. (NYSE:WMT) bought back 30 million shares, with the total transaction value of around $2.2 billion. It also paid out $1.6 billion in dividends, bringing the total cash return to shareholders to $3.8 billion in the first quarter. In the second quarter of 2013, the retailer is estimated to generate around $1.22 to $1.27 in earnings per share.
What is the best pick now?
In order to compare the companies, let’s look at their operating metrics:
| Bed Bath & Beyond | Target | Wal-Mart | |
|---|---|---|---|
| ROIC (%) | 26.2 | 6.3 | 12.3 |
| Dividend yield (%) | N/A | 2.4 | 2.4 |
| EBITDA multiple | 8.5 | 7.7 | 8.3 |
Income investors might like Target Corporation (NYSE:TGT) and Wal-Mart with their good dividend yields of 2.4% while Bed Bath & Beyond does not pay any dividends. What attracts me the most to Bed Bath & Beyond is it’s high profitability, with the highest return on invested capital (ROIC) of the three companies at 26.2%. Wal-Mart’s ROIC was less than half of Bed Bath & Beyond’s at only 12.3%, while Target Corporation (NYSE:TGT) was the least profitable business with the lowest ROIC at 6.3%. As a result, Bed Bath & Beyond could demand the premium valuation.
My Foolish take
As Bed Bath & Beyond has a strong balance sheet, high profitability, a reasonable valuation and potential share buybacks to return cash to shareholders, I personally think that this retailer is a good long-term pick for patient investors. Income investors could also choose Wal-Mart because of its market-leading position, good profitability and decent dividend yield.
The article Is This Retailer a Good Pick Now? originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond. Anh 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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