BAMM announced a one time, $3 per share cash dividend that will be paid out on 7/5/2007. The dividend will cost BAMM approximately $50.4 million.
First of all, where will the cash for the dividend come from? While there was no cash balance released in the filed 8K, based on historical trends BAMM should have roughly $40 million in cash.
Also, due to the release of Harry Potter next month the company maybe experiencing an unusually high number of prepayments. I called the customer service line (1-800-201-3550) and they told me that if I want to pick up the Harry Potter book on the day of the release I can go into the store and get a voucher but I have to pay for it upfront. I am not sure how big of a cash influx this will create but there is certainly some.
Even if the company can pay out the entire $50 million without borrowing, it will have to borrow at some point in 2008 to fund the build up in inventory for the large Q4 selling season. BAMM has plenty of liquidity to fund the dividend as they have a $100 million credit facility which is 100% available to fund operations.
The bigger question is what does this dividend signal about BAMM’s long term prospects?
I think the dividend announcement reinforces the point I made in an earlier post on BAMM. While I still don’t like the valuation and the industry is facing some serious problems, this announcement shows once again that management is focused on generating value for the shareholder -- and I don’t want to bet against them with a short position.
I think the immediate impact of the dividend will be to increase ROE as book value will fall and this company can certainly service a little debt if they have to borrow to fund the dividend.
In the long term I think nothing changes. The company is still posting negative SSS which means that if they want to post any type of top line growth (even to keep up with inflation) they need to keep investing in more stores which will show diminishing returns every year if SSS trends remain negative. And the stock is still not cheap, including Q1 results BAMM is still trading at 15x earnings.
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
Showing posts with label BAMM. Show all posts
Showing posts with label BAMM. Show all posts
Jun 10, 2007
May 31, 2007
BAMM – Q1:2007 Earnings
BAMM reported its fiscal Q1 results on 5/29/07
Here is what I was looking for when reading the press release:
“For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.” http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-final-thoughts.html
Looks like the company continues to improve operationally:
GMargin up 40bps YoY
EBITDA Margin up 55bps to 5.84% YoY
EPS up 44% YoY to $0.13 per share, also beat estimates by 1c and it looks like 2007 full year estimates were raised by 5c to $1.20
From the SSS perspective the company continues to struggle with SSS down 50bps.
At current price of $16.44, BAMM trades at roughly 15x of market value. The company has a lower EV than Market value making the valuation seem a little lower at 12x but due to the nature of the business you could not pull the cash out and still run the business.
I continue to think that the current valuation is to high to provide any margin of safety for a company facing negative SSS in an industry with some serious problems, also I can’t forget the massive insider sales the last time the stock had a decent up move (http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-da-bears.html)
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
Here is what I was looking for when reading the press release:
“For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.” http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-final-thoughts.html
Looks like the company continues to improve operationally:
GMargin up 40bps YoY
EBITDA Margin up 55bps to 5.84% YoY
EPS up 44% YoY to $0.13 per share, also beat estimates by 1c and it looks like 2007 full year estimates were raised by 5c to $1.20
From the SSS perspective the company continues to struggle with SSS down 50bps.
At current price of $16.44, BAMM trades at roughly 15x of market value. The company has a lower EV than Market value making the valuation seem a little lower at 12x but due to the nature of the business you could not pull the cash out and still run the business.
I continue to think that the current valuation is to high to provide any margin of safety for a company facing negative SSS in an industry with some serious problems, also I can’t forget the massive insider sales the last time the stock had a decent up move (http://offthebeatenpathinvestments.blogspot.com/2007/05/bamm-da-bears.html)
* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.
May 21, 2007
BAMM -- Final Thoughts
Based on the last 3 posts, its pretty obvious that I am not planning to buy shares at this point. Just to recap ....... management is unloading shares, the valuation does not look particularly cheap, YoY growth is due to one time gains, SSS are negative, the industry is in a secular decline.
So why not short, management is after all unloading shares into up moves in case that point was not made obvious already?
The main reason I am not getting a short ticket ready is that I don’t want to bet against management at valuations that are no longer in the ridiculous category. It looks like management is making incremental improvements in operations every quarter and are not wasting their cash – that’s usually not a recipe for good short trades.
If the company can continue to improve operations over the next few years this stock can do very well despite the problems with the industry. For example, despite the recent improvement BAMM is still behind Borders (BGP) from an inventory turns perspective. If BAMM can get to BGP’s level of efficiency, the business can throw off somewhere between $100M - $150M in free cash over the next 2-3 years, if they can get half way there they can dislodge $50 - $75M in cold hard cash. This is a huge windfall for a stock with market value of $277M.
The problem is that I don’t know if the low hanging fruit has been picked or if there are still more easy improvements to be made. A secondary concern is the Harry Potter release, who knows how much hysteria this will generate.
What am I looking for to make a trade? For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.
Overall, my sense is that this stock is trading at a valuation that is a premium for a declining business because management has gained some credibility and effects of Harry Potter are being discounted by the market.
So why not short, management is after all unloading shares into up moves in case that point was not made obvious already?
The main reason I am not getting a short ticket ready is that I don’t want to bet against management at valuations that are no longer in the ridiculous category. It looks like management is making incremental improvements in operations every quarter and are not wasting their cash – that’s usually not a recipe for good short trades.
If the company can continue to improve operations over the next few years this stock can do very well despite the problems with the industry. For example, despite the recent improvement BAMM is still behind Borders (BGP) from an inventory turns perspective. If BAMM can get to BGP’s level of efficiency, the business can throw off somewhere between $100M - $150M in free cash over the next 2-3 years, if they can get half way there they can dislodge $50 - $75M in cold hard cash. This is a huge windfall for a stock with market value of $277M.
The problem is that I don’t know if the low hanging fruit has been picked or if there are still more easy improvements to be made. A secondary concern is the Harry Potter release, who knows how much hysteria this will generate.
What am I looking for to make a trade? For a long position, I am looking for continued operating improvements, lack of insider sales, falling stock price (at roughly $12 the stock would trade at roughly half the valuation of the broad market), positive SSS. To make a short trade I am looking for the opposite to happen.
Overall, my sense is that this stock is trading at a valuation that is a premium for a declining business because management has gained some credibility and effects of Harry Potter are being discounted by the market.
BAMM -- “Da Bulls”
BAMM’s management has drastically improved operations over the last 3 years and looks like the company is becoming more efficient every quarter. Inventory turnover has increased consistently as inventory levels have grown slower than sales.
The company could have wasted cash on aggressively expanding its store base, instead management reduced debt from a high of $45M to a current level of $7M. At $45M in debt, debt-to-equity was 45% while currently debt-to-capital is at 4%.
The company raised its dividend rate by 60% in fy2007 to 32c per share and raised it again for fy2008 by 12.5% to 36c per share. This is certainly a good sign in management’s confidence in the cash flow generation ability of the business.
The company is coming up on arguably the biggest book sales even in recent memory with the last installment of Harry Potter hitting stores in July. This will be a huge event for the company and due to the strength of the balance sheet BAMM is in better financial position to wring out max number of sales.
The company could have wasted cash on aggressively expanding its store base, instead management reduced debt from a high of $45M to a current level of $7M. At $45M in debt, debt-to-equity was 45% while currently debt-to-capital is at 4%.
The company raised its dividend rate by 60% in fy2007 to 32c per share and raised it again for fy2008 by 12.5% to 36c per share. This is certainly a good sign in management’s confidence in the cash flow generation ability of the business.
The company is coming up on arguably the biggest book sales even in recent memory with the last installment of Harry Potter hitting stores in July. This will be a huge event for the company and due to the strength of the balance sheet BAMM is in better financial position to wring out max number of sales.
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.
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.
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).
-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).
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