Bed Bath & Beyond Inc. (BBBY) Quarterly Valuation

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Bed Bath & Beyond is a growing retail company, and many investors may classify it as a “growth” company rather than a “value” company, but the fact is that the two are not mutually exclusive.  A “growth” company can be a “value” company so long as the market is trading at a rate less than the intrinsic value.  An investor simply needs to determine the intrinsic value through fundamental analysis, then look to see how the market is trading relative to that intrinsic value.  By using a ModernGraham analysis, one can maintain a systematic analysis across companies and even industries to easily compare one potential investment’s risk level and opportunity for value against another potential investment.  What follows is a specific look at how Bed Bath & Beyond Inc. fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Bed Bath & Beyond Inc. is a chain of retail stores, operating under the names Bed Bath & Beyond (BBB), Christmas Tree Shops (CTS), Harmon and Harmon Face Values (Harmon), buybuy BABY and World Market or Cost Plus World Market (World Market). In addition, it is a partner in a joint venture, which operates three stores in the Mexico City market under the name Bed Bath & Beyond. 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 and general home. During fiscal year ended March 2, 2013 (fiscal 2012), the Company opened a total of 38 stores, including 12 BBB stores throughout the United States and Canada, five CTS stores, one Harmon store and 18 buybuy BABY stores, and six World Market stores throughout the United States and closed one BBB store.

Defensive and Enterprising Investor Tests:

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

MG Value $161.60
MG Opinion Undervalued
Value Based on 3% Growth $60.86
Value Based on 0% Growth $35.68
Market Implied Growth Rate 3.50%
Net Current Asset Value (NCAV) $7.70
PEmg 15.51
Current Ratio 2.21
PB Ratio 3.36

Balance Sheet – 11/30/2013

2013 (estimate) $4.82
2012 $4.56
2011 $4.06
2010 $3.07
2009 $2.30
2008 $1.64
2007 $2.10
2006 $2.09
2005 $1.92
2004 $1.65
2003 $1.31

Earnings Per Share

2013 (estimate) $4.82
2012 $4.56
2011 $4.06
2010 $3.07
2009 $2.30
2008 $1.64
2007 $2.10
2006 $2.09
2005 $1.92
2004 $1.65
2003 $1.31

Earnings Per Share – ModernGraham 

2013 (estimate) $4.20
2012 $3.63
2011 $2.99
2010 $2.38
2009 $2.03
2008 $1.89

Conclusion:

Bed Bath & Beyond Inc. is an extremely interesting company for value investors.  It is not suitable for the Defensive Investor, by not paying dividends and by trading at a high PB ratio, but it is suitable for the Enterprising Investor because its balance sheet and earnings history are strong enough to overcome the lack of dividend payments.  As a result, Enterprising Investors seeking to follow the ModernGraham methods, based on Benjamin Graham’s classic The Intelligent Investor, should feel comfortable proceeding with further research into the company and comparing its prospects against other companies that pass the ModernGraham requirements such as through a review of ModernGraham’s analysis of Target Inc. (TGT).  From a valuation perspective, the company looks great, having grown EPSmg (normalized earnings) from $1.89 in 2008 to an estimated $4.20 for 2013.  This outstanding level of growth far surpasses the market’s implied growth rate of 3.50%, and the ModernGraham valuation model returns an intrinsic value that is considerably higher than the current market price.

What do you think?  What value would you put on Bed Bath & Beyond (BBBY)?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Bed Bath & Beyond (BBBY) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.


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