Don't Be Fooled by Barnes & Noble's Pop

Updated

U.S. stocks are ahead this morning, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.35% and 0.36%, respectively, at 10:05 a.m. EDT.

Barnes & Noble moves on, but will it move up?
Less than two weeks after bookseller Barnes & Noblereleased abysmal quarterly results, CEO William Lynch is out, having resigned after three years on the job. The departure is a final acknowledgement of Barnes & Noble's failed digital strategy; Mr. Lynch championed the development of the Nook e-book store, e-reader, and tablets. Last month, the company announced it would no longer manufacture its own Nook tablets.

Barnes & Noble's future course is highly uncertain, but Lynch's exit and the promotion of Michael Huseby to CEO of Nook media, which covers the company's digital business and its college book stores, suggests a breakup may be in the works (Mitchell Klipper remains chief executive of the traditional bookstore activity). In January, executive chairman Leonard Riggio, who owns 30% of the company, produced an offer to buy the traditional book stores.


Two weeks ago, commenting on B&N's results, I concluded:

As far as its bricks-and-mortar stores are concerned, Barnes & Noble is a business in decline, perhaps even terminal decline. There may be a size at which the company can produce steady profits, but it's hard to say quite where that "sweet spot" lies (assuming it even exists.) For investors, it's not impossible to make money speculating on businesses in that situation, but it requires timing, luck, and constant vigilance. There are certainly easier ways for investors to eke out a return.

As of yesterday's close, the shares are up more than 13% since then. It appears June 25 marked a short-term bottom in the stock:

BKS Chart
BKS Chart

BKS data by YCharts.

And the shares are up an extra 2.8% this morning. Nevertheless, I'm going to stick with my initial assessment at this stage. With an enterprise value of 8.1 times the (highly uncertain) estimate of the next 12 months' EBITDA (earnings before interest, taxes, depreciation, and amortization -- a measure of cashflow), I don't think the company is cheap enough to account for the decline in its businesses. Furthermore, one need only go back as far as February on this year's chart to verify that there is plenty of potential downside to the stock price. In sum, Barnes & Noble is not a bottom-fishing candidate.

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The article Don't Be Fooled by Barnes & Noble's Pop originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on LinkedIn. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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