BAMM -- “Da Bears”

I think the single worst thing about BAMM is the signal that management is sending to shareholders by their latest actions. On April 2, 2007 the company reported their fiscal 4th quarter results which showed significant YoY improvement (due to 1 extra week + one time gain), the stock popped from $14.25 to $17.50 and kept going up until it hit $19+change a couple of weeks later.

On April 9th, 5 different insiders unloaded 1.321 million shares at $17.92 which is a huge amount of stock for a company with 8M share float and 16M in total shares outstanding. How should investors read this? Management is basically saying that they are going to unload a lot of shares whenever the stock has a decent move up.

I think there are two main reasons that prospects for the stock look dim at this price.

First, the industry is in secular decline. There is nothing that management can do about this. They can be the best book store operator in the industry, but an industry in decline is a huge headwind to fight against. This is effecting BAMM in the form of same store sales which were down 0.6% in the latest fiscal year and were down 2.4% in their most important fourth quarter. Unless there is some major change in industry fundamentals, investing in BAMM (or other old line book retailers) will be like swimming against the tide.

Second, at the right price an investment in a bad industry might be justified. However, it does not appear that BAMM is particularly cheap. Based on my previous post the company is currently trading at an adjusted FCF/EV of 6% which is a P/FCF of 16x – 17x which is roughly in line with where S&P 500 is trading.

More importantly, based on pretty bullish SSS estimates for FY2008 BAMM doesn’t look particularly cheap. Based on my previous post, the company should generate roughly $19M in operating cash flow (actual free cash flow maybe more/less due to difference between my assumption for maintenance CAPEX and actual CAPEX) which would increase cash on hand to roughly $53M less $7M in long-term debt. This gives a forward FCF/EV of 8.2% or forward EV/FCF of 12x-13x.

Furthermore, the cash yields provided assume that all cash can be taken out of the business and distributed to shareholders. The reality is that this is a very capital intensive business and there is absolutely no way the company can distribute all its cash and maintain similar cash flow. BAMM basically spends down most of its cash on hand by the end of fiscal Q3 (ending in October) in preparation for the big fourth quarter and gets it back at the end of the Q4. Looking at historical working capital requirements it looks like the company can basically pay off its long term debt but the rest of the cash is needed to run the business.

Assuming the working capital needs, a mor realist valuation is 18x-19x trailing and 14x – 15x forward price/fcf.