Bed Bath & Beyond (BBBY) analysis
Bed Bath & Beyond (BBBY) trading around $38/share with a P/E of 19 and 17x EPS appears inexpensive at first glance. Let’s take a closer look; Bed Bath & Beyond operates 760 Bed Bath & Beyond stores throughout the United States. The company also owns Christmas Tree Shops, a 31-store giftware and household items retailer, and Harmon Stores, a 38-store health- and beauty-care retailer. The stores' floor-to-ceiling shelves stock better-quality bed linens, kitchen items, and home furnishings (seekingalpha, 2006).
Alhtough BBBY’s P/E of 19 makes it’s a little on the expensive side, it’s hard not to miss the cash balance of $817M and no long term debt. This large cash position is important to point out as this makes the company an attractive target for Leverage Buyout (LBO). Whether LBO firm finds this company a value or not, the company can easily return this cash to shareholders through share repurchase or even acquisition.
As BBBY mature as a company, high growth is much harder to achieve. Therefore, to satisfy Wall Street, an acquisition and share repurchase is the most logical path of providing shareholder value. With a large balance of cash on hand, we expect this company to grow through acquisition in 2007. Obviously, just because a company has a lot of cash on hand doesn’t mean it should be a good place to put your hard earned money.
Looking at the 1 year historical chart, the stock appears to be trading close to its 52 week high ($41.72). It would take significant news to move this stock past the $41/share. Therefore, this is a stock that will require patience. While we agreed with some investors in that BBBY could trade to the upside in 2007 if management takes it upon itself to unlock all the value; buying a small position at the current level could be a prudent move. Upon closer inspection, BBBY technical is not as inexpensive as one would think when compared to its competitors such as Target (TGT) and Wal-Mart (WMT).
The bottom line is BBBY is a sound company with plenty of cash. For this reason, it’s a relatively safe bet as a long term investment. On a relative valuation basis, assuming y/y comps grow ~450bps, some have justify BBBY at fair market value of $45/share. This is assuming 2007 macroeconomic environment is fair to moderate. If the macroeconomic condition improves in 2007 (This mean the housing market needs to stabilize), we see this stock in the $45-$50 range.
