Bed Bath and Beyond, Inc. (Nasdaq: BBBY) and its subsidiaries, are a chain of retail stores, operating under the names Bed Bath and Beyond, Christmas Tree Shops, Harmon and Harmon Face Values, and buybuy BABY. In addition, the company is a partner in a joint venture which operates two stores in the Mexico City market under the name Home and More.
The company sells a wide assortment of domestics merchandise and home furnishings. Domestics merchandise includes categories such as bed linens and related items, bath items and kitchen textiles. Home furnishings include categories such as kitchen and tabletop items, fine tabletop, basic housewares, general home furnishings, consumables and certain juvenile products.
The company believes that it is the nation’s largest operator of stores selling predominantly domestics merchandise and home furnishings while offering a breadth and depth of selection in most of its product categories that exceeds what is generally available in department stores or other specialty retail stores.
Financial information presented in this report for Bed Bath and Beyond, Inc., is based on the company’s most recent SEC Form 10-K filing for year ending February 26, 2011, as filed with the Securities and Exchange Commission on April 26, 2011.
The stock closed recently at $56.13, with Resistance at $57.90, a 3% increase from the recent close, First Support at $50.15, an 11% decline from the recent close and Second Support at $45.38, a 19% decline from the recent close. Should the stock price break through Second Support, the next support level is $26.50, a 53% decline from a recent close.
Long-Term (5 Year Hold) Investment
In review of the company’s latest annual financial information, we note that the Current Ratio at 3.08 and the Cash Ratio at 1.35, were what we consider investment quality, while the Quick Ratio at 1.35 was slightly below our investment quality target. In addition, Debt to EBITDA at 0.13, Debt to Equity at 0.05, and Free Cash Flow at $3.76, a 22% year over year increase, were also within our investment quality parameters.
We are value investors, attempting to determine the value of an entire company based on its most recent audited financial information. As such, we simply refuse to pay for earnings growth and make no inclusion of it in our valuation estimates.
However, we realize that many investors care a great deal about earnings growth and base their investment decisions on the spread between year over year earnings growth and the current PE.
In the case of Bed Bath and Beyond, Inc., the company was had year over year earnings growth of 39%, ending FY11 with earnings of $3.76 per share. With a current PE of 15, the spread between earnings growth and the PE is about 3, meaning that for a value investor considering earnings growth, a fair value for the stock is about $66.
Based on our review of the company’s latest annual financial information we think a Reasonable Value Estimate for the company is in the $51-$53 range.
Assuming all due diligence was performed prior, we would set a Buy Target in the $31-$33 range, a First Sell Target in the $61-$63 range, and a Close Target in the $65-$66 range.
Based on our assessment of the company’s financial information that we reviewed, we believe a reasonable financial risk multiplier is 78. Accordingly, for the more risk averse value investor, we would set a Buy Target in the $25 to $27 range.
Considering a recent close of $56.13, an estimated Merger and Acquisition payback of 9.2 years (assuming EBITDA remains the same), and Free Cash Flow of $3.76, we think the stock is currently fairly valued, and have no interest in adding the company to the Wax Ink Portfolio at this time.
We have no position in Bed Bath and Beyond, Inc. and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.