BAMM -- First Look

Initially attracted to the stock for the following reasons:
-operates in an industry that everyone knows is in secular decline, when everyone is sure of something there is often an opportunity
-ebitda and eps up 17% and 56% YoY, but stock down from a high of $23.7 in the beginning of the year to a current price of $16.8
-lots of cash and very little debt, cash net debt is $27M or $1.60 per share
-company has made significant operating improvements over the last 4 years

Books-a-Million (BAMM) is a book retailer with stores located in the Southeastern states of the country. The company has 3 retail store concepts with 206 total stores, a wholesaling business, and an internet sales operation (link to latest 10K http://www.booksamillioninc.com/report/index.html)

The stock has grown nicely from $2 in early 2003 to a high of $22.5 in late 2006 and has since sold off to $17. The big move upmove in the stock is largely due to management’s ability to improve operating performance. Based on some rough calculations, the company has been able to pull out $50M-$60M in working capital since the end of fy2003 which has been used to pay off debt, increase the dividend, and increase the company cash stash.

Over the last 10 years the company has grown the top line steadily but faced some operating challenges between 2001-2003.
10yr Revenue CAGR 5.5%
10yr Gross Profit CAGR 6.4%
10yr EBITDA CARG 10.7%
Two things to keep in mind when looking at these growth rates. First, 2007 figures are adjusted to remove a one time gain from “card breakage” (more on this later). Second, all the EBITDA growth has occurred in the last 3 years as EBITDA more than doubled between end of 2004 and end of 2007. Between 1998 and 2004, BAMM was much better in destroying shareholder value than selling books. In the 7 years between 1998 and 2004, EBITDA declined 3.3% in nominal terms and much more so in real terms.

It looks like there is one analyst that covers the company with a 2008 eps estimate of $1.15. Without reading the report, I think he/she is making the assumption for 5% SSS which without any stock buybacks gets me to $1.13 - $1.17 per share in 2008. The only way I can see SSS changing from negative (SSS down 0.6% in fy2007) to positive is due to the last Harry Potter release scheduled for July 2007 and will be reflected in Q2 for fiscal 2008.

Based on adjustments made to 2007 reported numbers (for an extra week, one time gain from card breakage, maintance capex), I get revenue of $504, EBITDA of $38, and FCF of $15 -- the main point to take away is that these numbers are vitually the same as last year despite the reported jump in sales and profit. Using the published $1.15 eps estimate as a guidline and 5% SSS I get revenue of $528, EIBTDA of $43 and FCF of $19.

Based on $16.5 trading price the market value is $277M and if you assume you can pull all the cash out of the business and pay off debt I get and EV of $250, if you add the expected FCF in 2008 I get 2008 EV of $231M. On a traling 12 month basis BAMM is at roughly EV/FCF of 17x (250/15) and based and a forward 12 month EV/FCF of 12x (231/19).