The 1990s aren’t coming back — Barnes & Noble, Inc. (NYSE:BKS) stores are no longer stapled to every new local shopping mall. But, the bookstore chain has done something few experts thought was possible — survive the dominance of Amazon.com, Inc. (NASDAQ:AMZN). And, with Tuesday’s 9% selloff, opportunity is knocking on the doors of investors who’ve waited to make money on BKS stock.
Helped by its 2009 acquisition of its college bookstore business, a decision that came with much criticism, Barnes & Noble has turned itself from a struggling brick-and-mortar book seller to a company with underestimated growth potential, suggesting BKS stock should be on investors’ radar.
Plus, with the company now more focused, the Barnes & Noble brand has not only become more valuable for current investors, but also as a potential acquisition target for a company looking to diversify its offering.
What is Barnes & Noble and What Can it Become?
Barnes & Noble, headquartered in New York, NY, had been a tough company and stock to understand, given its various businesses that operate in different industries.
Its e-reader Nook business, for instance, which until recently was 16.8% owned by Microsoft Corporation (NASDAQ:MSFT), suggests BKS was a tech company. Then, of course, there is the retail book store, B&N Retail, and the college business, B&N College.
The challenge for investors is figuring out how much each of these businesses is worth. Complicating matters, each operates in a different way.
Things are about to change.
Understanding the underlying strengths and weaknesses of each Barnes & Noble business is an important factor in the investment decision process. This is what BKS management realizes as it plans to spin off the college business into its own publicly-traded entity called Barnes & Noble Education.
All told, this is where much of BKS stock’s overall value will be unlocked.
Barnes & Noble expects to complete the spin off by the end of August, and expects to raise as much as $775 million through this public offering, according to a filing with the Securities and Exchange Commission.
BKS investors should focus on the number of opportunities this opens up for Barnes & Noble.
The college business alone operates over 700 stores on college campuses in the U.S. This gives Barnes & Noble access to roughly 23% of students on U.S. college campuses. Spinning off of the college business will underscore strength it has already shown.
Consider, as of the fiscal second quarter, while overall revenue at Barnes & Noble was down almost 3% from last year to $1.69 billion, the college business was the only segment that posted growth, with revenue of $751 million, an increase of 2%. This means the college business, which accounts for 44% of total sales, still has plenty of room to grow.
According to the National Center for Education Statistics, there are more than 7,000 post-secondary institutions in the U.S. Of that total, 4,600 colleges issue degrees. This means Barnes & Noble’s college business has only reached about 10% of the education market. And assuming it targets degree-issuing colleges, its 700 locations still implies penetration of only 15%.
In other words, Barnes & Noble’s college business is still on the verge of exceptional growth. With the prospect of it becoming a pure-play college growth segment, this makes fears about Barnes & Noble succumbing to pressures from Amazon a non-issue.
The college students BKS can attract will be exposed to other Barnes & Noble products, which makes them more likely to remain Barnes & Noble customers after graduation. Not to mention, that’s when their shopping and earning power becomes more of a factor to Barnes & Noble’s long-term success, which bodes well for BKS stock in the long term.
In short, investors should buy on Tuesday’s 9% selloff, which erased BKS’ entire 2015 stock gains. With shares around $22, investors can expect the stock to reach $26-$28 in the next 6-12 months, gaining 25% thanks to easier comps and a clearer operational focus.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
