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Is Barnes & Noble Still Undervalued?

The company clawed back some losses in the last week

   

Is there a place — much less a future — for booksellers in our increasingly digital world?

Well, last man standing Barnes & Noble (NYSE:BKS) — the largest remaining bookseller in the U.S. (or the world, for that matter) — has shown that embracing technology is a must in order to remain viable. Many brick-and-mortar shops have been unable to survive the combined assault of e-books, e-readers and online shopping — led, of course, by Amazon (NASDAQ:AMZN).

Barnes & Noble, on the other hand, has maintained its retail presence while charging into digital — a move that helped it outlast competing chains such as Borders, not to mention countless independent book stores.

But while the company may still be around, its valuation has dropped considerably in the past five years.

Ups and (More) Downs

Overall, the stock’s yo-yo movement in the last five years tallies up to whopping 57% losses — a slide that shows the company isn’t completely immune to the Amazon effect. BKS hit a low point early in 2011, slipping below $9 shortly after Borders declared bankruptcy — and after missing earnings expectations, suspending its quarterly dividend and declining to provide guidance for the coming quarter.

Shortly after, positive reviews of the new Nook e-readers and tablets, coupled with a decent earnings report, propelled the stock upwards 125% in three months. It didn’t last, though. By the time Liberty Media‘s (NASDAQ:LMCA) acquisition of a 16.6% stake in the company was announced in August, BKS had slipped below $10 again — a more than 50% drop.

Another notable stock shifts came in earlier this year around the time that the company announced a strategic partnership with Microsoft (NASDAQ:MSFT), in which tech giant agreed to invest $300 million in the Nook business. Shares hit a high over $20, but began moving downwards soon after.

Most recently of all, BKS made notable gains earlier this week. Investors had sent the stock down around 11% after a disappointing quarterly report in late November, but decided the sell-off was overdone. The stock regained that loss and then some, climbing 14% from its post-reporting low.

The question, though, is whether the stock can it go any higher. Even with recent gains gains, Barnes & Noble is currently valued at under $1 billion — $954 million to be more precise.

That seems a bit low for the world’s biggest bookseller, which boasts some 1,300 locations across the U.S., 30,000 employees, a line of highly regarded e-book readers and tablets, an online bookstore claiming 27% of the world e-book market, a $300 million digital media investment from Microsoft and 600 on-campus college bookstores.

Right?

The Next Chapter

Well, BKS does appear to be at a peak in its up-and-down cycle, but not a particularly lofty one. The stock is nearly 25% off its 2012 and 2011 highs and not even in the same ballpark as the $46 Barnes & Noble commanded only six years ago.

Some don’t like Barnes & Noble’s chances, viewing its retail stores as a drag on operations and noting the increased competition in the tablet space. The Nook was the best-selling Android tablet before the Kindle Fire … and then Google’s (NASDAQ:GOOG) Nexus launched, knocking the Nook to “alternative” status.

On the other side of the coin, Barnes & Noble just announced a deal to sell its Nook tablets in Walmart (NYSE:WMT) stores and on its website — especially notable considering Walmart kicked Amazon and its Kindles out of stores back in September.

That’s certainly going to help with the visibility of the Nook devices. Plus, Barrons has added BKS to its “Favorite Stocks for 2013” list, pointing precisely to its potential. The company controls of two thirds of U.S. book retail space and its stores alone are probably worth close to the current market cap, the article explained.

Plus, the fact that BKS continues to be a major player in the e-book market against giants like Apple (NASDAQ:AAPL) and Amazon is largely left out of the current stock value, giving it room to grow.

A Happy Ending

I see a solid future for the company as well — both in the short-term and down the line. Consumers like choices, and many e-book buyers are wary of Amazon’s proprietary Kindle format. Barnes & Noble’s e-books, on the other hand, are compatible with e-readers from other manufacturers.

Toss in a 27% market share and it seems likely that the company’s e-book efforts will continue to be successful. At the same time, its NOOK devices — while not the top sellers in their categories — are highly respected. Plus, the tablet market in general is growing in leaps and bounds. Combine that with increased shelf visibility thanks to the Walmart deal, and sales look set to healthy.

For the cherry on top, the company’s recent expansion of the Nook into international markets could grow sales even further. Oh, and let’s not forget the fact that some people prefer to buy old school dead-tree books in old school brick-and-mortar bookstores. For that demographic, Barnes & Noble is pretty much it.

Don’t shut the book on this company just yet.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/12/is-barnes-noble-still-undervalued/.

©2014 InvestorPlace Media, LLC

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