Bookseller Barnes & Noble (BKS) has collected an unusual assortment of cheerleaders in its struggle for survival, ranging from publishers, to Microsoft (MSFT), to retailers like Target (TGT) and Wal-Mart (WMT) that share its pain as showrooms for Amazon.com (AMZN). Lately, a few notable investors have chimed in as fans, too.
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This week, Barnes & Noble appeared in Barron’s “Our 10 Favorite Stocks for 2013” list, right there next to Apple (AAPL) and JPMorgan Chase (JPM) and the like. In October, Microsoft spent $300 million to get a 17.6% stake in Barnes & Noble’s newly created Nook Media division, which includes about 660 college bookstores as well as the e-reader. Hedge funder Whitney Tilson of T2 Investments bought into Barnes & Noble during the third quarter, and Michael Price’s MFP Investors added, although each did so in a modest way. If they want to buy more, this stock chart shows it won't cost them much.
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Those are respectable votes of confidence for a company that looked headed for death a couple of years ago. Two key factors in the optimism: great reviews and promising sales reports for the Nook, and a share price that leads some to believe the entire company is very undervalued.
According to industry reports, Nook is doing a great job of eating into Amazon Kindle’s e-reader market. It’s an equivocal win for now, considering that each Nook sale cuts into its profit margin. Investing in the technology and discounting to gain market share probably will go on for years – Amazon has been at it for a decade with various products – but many investors believe the Nook division will one day be large enough to spin off as a stand-alone tech company. This is the real Holy Grail for a lot of B&N investors now.
Don't bother with the PE ratio. Valuation noodling goes like this: If Microsoft’s share of Nook Media was worth $300 million, the thinking goes, Barnes & Noble’s remaining stake is theoretically worth $1.4 billion, or $23 a share. (It’s not at the moment because Nooks lose money.) That $23 is a long way from the $11 to $17 range Barnes & Noble shares have been stuck in for more than a year. If they’re even close to correct about Nook’s valuation, the share price today is giving no value to Barnes and Noble’s biggest business, those 700 or so (non-college) bookstores that still provide half its revenues. In that case, today’s share price and resulting market cap are way too low.
There’s still a debate about whether these stores are assets or liabilities long-term. (Will readers abandon actual books altogether, or not?) Trends here are hard to discern at the moment because sales last year were helped greatly by the demise of Borders, B&N’s largest competitor. The company forecasts very little change in comparable stores sales this fiscal year. But this is a profitable division that now controls an astounding 65% of the retail book shelf space in the U.S. If there is a future at all for bookstores, surely Barnes & Noble will stand out in it.
Some retailers are doing their bit to help Barnes & Noble succeed. Target and Wal-Mart Stores, pissed at Amazon for teaching consumers how to browse in stores and buy online, have refused to sell Kindles this Christmas. Promotions for Nooks at these massive outlets are running high. Perhaps if they could just get Best Buy (BBY) on board….
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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