If books are dead, why is B&N stock so hot?
Now read this: The retailer is sitting on an astonishing gain of 46% so far this year.
The doors of New York's Javits Center swung open wide this morning to welcome thousands of booksellers, publishers, librarians, authors and their agents at the annual jamboree known as BookExpo. Almost certainly, the event will resurrect the seemingly endless debate over e-books and the future of reading.
While Barnes & Noble (BKS) and its Nook e-book division may not be among this year's exhibitors, the book industry headlines that likely will hit the papers in the coming days should prompt investors to consider the many risks that hover over the book retailing giant's head, especially given that the stock is now sitting on a 34.5% return over the last 12 months and an astonishing gain of 46% so far this year.
The company is due to release its fourth-quarter earnings soon, and they may well be even more depressing than its third-quarter results, which saw a 10% revenue shortfall and a net loss when analysts had been calling for a profit. Barnes & Noble's operating cash flow is solidly in the red, thanks in part to the costs of ensuring that its Nook e-book franchise keeps up with Amazon's (AMZN) Kindle -- not to mention Apple's (AAPL) iPad, which has a secondary role as a reading device. And questions about the fate of Nook and of Barnes & Noble's bricks-and-mortar business are -- or should be -- overshadowing the performance of the company's stock.
While companies like Dell (DELL) and Best Buy (BBY) continue to battle with similar questions about the sustainability of their business models and have suitors in the wings eager to take them private at a suitably inexpensive price, Barnes & Noble must deal with two separate sets of uncertainties. On the one hand, Leonard Riggio, chairman of Barnes & Noble and its single largest shareholder, has said he might be interested in formally separating the traditional and the e-books business and taking the former private in a buyout. Meanwhile, rumblings that Microsoft (MSFT) might be willing to fork over up to $1 billion for Nook Media's digital business is largely responsible for the latest and largest surge in Barnes & Noble's share price. (Microsoft owns and publishes Top Stocks, an MSN Money site.)
But there are no formal proposals in place, and the only certainties about Barnes & Noble are those large losses and the wobbly business model, not to mention an outsize debt burden and anemic cash flow. Investors who have gleefully bid up the price of the company may want to stop and ponder whether Microsoft will really make a formal bid of $1 billion for a business whose sales appear to have peaked in 2011. They should also consider how much financing Riggio can nail down for his own bid for a retailer that got its biggest sales boost not because of any fundamental improvement in its business but because its largest rival, Borders, went bankrupt.
Let me confess that Barnes & Noble's lack of investment appeal is, on a personal level, an almost Shakespearean tragedy. I'm a bibliophile -- no, make that a bibliomaniac -- with more than 6,000 volumes in my personal library, many of which made their way onto my shelves from those of Barnes & Noble. I'm also the proud owner of multiple e-readers.
But I can't don blinkers to block out the reality that I'm in a minority: Of those who do still read and read widely, few are routine visitors to bookstores. A growing number hunt for their "dead tree books" at online or discount shops (Amazon, for one) and a significant number are dedicated online consumers. So while Barnes & Noble now may rule the bricks and mortar book-retailing world in the U.S., that simply isn't a growth business.
This post was condensed for Top Stocks, but you can read the full article here.Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.
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