·Abbreviations:
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
o Operating Income (OI)
o Enterprise Value (EV)
o Price-to-earnings ratio (P/E)
Bed Bath & Beyond is engaged in the home furnishing retail business. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before we get to those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
Pros:
·The share price is <$15
o I may have a counterparty advantage, e.g. institutional investors may have rules preventing the purchase of lower priced, smaller Market Cap stocks. If so, I’m competing against fewer buyers to purchase shares, but may have more buyers to sell shares to if the share price and/or Market Cap increase.
·The stock recently experienced a surge in volume, which might indicate a sentiment shift regarding the company
Cons:
·The % of shares short is >15%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·Debt/MC is >700%
·The balance sheet seems bad, exhibiting negative BV
·The company’s OI is negative over the last twelve months
·The company has a tough year-over-year comparison in the upcoming quarter
·Operating Profit Margins are down sequentially and year-over-year
Those pros and cons and—more importantly—the company’s average ROIC (9% over the last 10-years) make it seem unlikely that the company has durable competitive advantages. So, I deem the company not good quantitatively and value it relative to its liquidation value, TBV of -$8.80. With negative TBV, BBBY cannot meet my definition of an investment and MFV can only be $0.00.
Conclusion: Bed Bath & Beyond is good example of a value destroyer. This is the fourth time I’ve valued shares since October, 2020. Since then, BV has collapsed from $13.66 to -$8.80. Correspondingly, MFV has fallen to $0. The company’s Working Capital has fallen from $1.4b to $215mm. Thus, it seems likely to become technically insolvent in the near-term. I love a cheap stock, but BBBY only looks cheap in absolute terms. In relative terms, it seems infinitely expensive. Hard pass, at any price, unless the business turns around and TBV becomes positive. I’m happy to miss any potential turnaround rally to avoid the risks of speculating and/or building narratives (https://www.veriteventures.com/post/what-is-investing) around a turnaround.
My positioning: None
For more information about how and why I designate companies not good read here: (https://www.veriteventures.com/post/how-i-value-most-assets-companies)
-V
*Post prepared using data as of 1/13/23
**I’m using the company’s historical Book Value multiple as a proxy for Tangible Book because TB is <=BV and BV multiples are more readily available from data providers.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.