In the July issue of Kiplinger’s, Whitney Tilson of T2 Partners, recommended Barnes & Noble (BKS) as a value play due to the following:

1. Well-run, market leader, strong balance sheet, trading at low multiple and buying back stock at healthy rate

2. Though it might be counterintuitive to buy a retail stock, rather wait for consumer trends to improve, the following analysis is what Tilson believes makes this a compelling buy:

a. at $30, the true market cap after deducting cash is $1.5 billion.

b. last year’s EBiTDA was $380 million and cash flow after capex was $238 milion

c. so, the stock is trading at 3.8x EBITDA and 6.1x free cash flow (so cash flow yield is 16.3% if all cash were paid out as dividends)

d. Tilson’s assertion is that a private buyer would pay 2x those ratios for a healthy business

3. Biggest risks are competition from Big Box retailers and Amazon.com; but, according to Tilson, Barnes & Noble offers a superior in-store experience that should allow it to grow for years to come.

Editorial- Barnes is a very well run business and the company is looking at buying Borders. BUT, look at the income statement; they haven’t increased net income in three years (2005 net income was higher than 2007).  I am a big believer that consumers need the in-store experience, however, there is a ton of pressure on the book business with websites and big box retailers. And, with gas prices higher and the economy suffering, more people will go to the libraries and/or go online and look for the best price.  What B&N is doing right is diversifying its product offerings on its website, expanding into toys, etc.  Amazon started out selling books and has become a mass merchant, so B&N ought to think about how it can use its brand name and expand into other products.  That is the challenge….can a true book brand build its revenue base?  Amazon had the luxury of being a website first.  I would question Tison’s assertion that a private buyer would pay 2x the current value.  Private buyers are not necessarily going to pay a much higher price for a business that has not increased its net income in 3 years—they can take out public company costs and put a multiple on that, but why would you pay that much for a business that has incredibly stiff competition down the road.

Track Tilson’s picks at:

http://www.trackthepros.com/categories.php?category_id=507