Inside Wall Street: Bed Bath and Beyond is a buyout bet

A huge drop in the share price of the leading home-furnishings chain store giant makes it vulnerable.

By Gene Marcial Feb 22, 2013 5:01PM

A customer enters a Bed Bath & Beyond store in Mountain View, Calif. on May 9, 2012 (© Paul Sakuma/AP Photo)Don't give up on Bed Bath & Beyond (BBBY), one of the few large retail companies that has missed the stock market’s robust rally. It's a turnaround play, if not a takeover bet.


Some savvy pros believe shares of the widely known chain store are now attractively priced -- not only for opportunistic investors but for strategic buyers seeking under-priced and depressed companies for possible buyout deals.


With the increasing frenzy along the mergers-and-acquisition front, cash-rich large companies along with a bunch of aggressive activist hedge funds and investment managers have been scouring the market for situations similar to the one facing Bed Bath & Beyond. Its stock is down to $57 a share, way off from its 52-week high of $75.84, which they argue makes BBBY a potentially juicy target.


BBBY operates more than 1,100 stores -- under the brands of Bed bath & Beyond, Christmas Tree Shops, Harmon, Harmon Face Values, buybuy Baby and World Market in the U.S. and Canada. In Mexico, it has a joint venture called Homed & More.


Indeed, while shares of BBBY dropped a lot in 2012 – down 21% since September -- its peer group in the home-furnishings industry advanced by an average of more than 60% in 2012.


So with the stock in a “deep dive,” here is an industry leader available at a huge discount, notes Laura Champine, retail  industry analyst at Canaccord Genuity, the global capital markets unit of Canaccord Financial. She rates the stock as a buy and has raised her 12-month price target to $74 a share from $72.


"We see a window of opportunity to buy a market leader with a 24% market share in the home-furnishings industry,” says Champine.


But setting aside the stock’s appeal as a takeover candidate, some analysts say the fundamentals in the company’s business should start improving. Near-term margins will likely remain under pressure, concedes Champine, but she expects a margin recovery to take hold over the longer term.

She notes BBBY still holds a sizable cash balance of $3.46 a share, “which we believe can support much-needed investments in e-commerce where the company is notably lacking," she says, "as well as further enhancing shareholder returns through (share) buybacks.”


Analyst Brian Nagel of Oppenheimer has raised his recommendation on BBBY to outperform from neutral, noting that sales and earnings weakness primarily reflected “transitory issues and to a certain extent the effects of recent aggressive internal investments -- and not structural shortcomings.”


Although he acknowledges that BBBY isn’t out of the woods, Nagel says he is increasingly optimistic that “trends could rebound meaningfully in the coming quarters," and that the stock is now due to reverse to the upside. “With the stock now trading at levels consistent with recent troughs," he notes, "we believe it’s marking a bottom.”


Why so? Nagel argues there are “indications of strengthening top- and bottom-line trends” that should minimize the concerns currently weighing down BBBY – which he believes will attract renewed buying into BBY’s stock.


So he has raised his fiscal 2013 earnings (ending Feb. 28) forecast to $5.05 a share from $5, and his 2014 estimate to $5.95 from $5.60. His earnings estimate for fiscal 2012 is $4.55,  up from fiscal 2011’s $4.06.


BBBY’s technical profile also indicates it is an enticingly under priced stock, note some analysts.


"The stock is attractively priced at 11 times our fiscal 2014 earnings per share estimate,

a significant discount to its five-year historical average of 16 times,” says Michael Souers, analyst at S&P Capital IQ. He rates the stock as a buy with a 12-month price target of $77 a share, or about 15 times his 201 earnings forecast.

Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.


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