Monday, March 28, 2011

Books-A-Million: All About Intentions

Books-A-Million (BAMM) is a retailer of books in the Southeastern United States. As use of e-readers and e-books continues to increase, bricks and mortar book retailers have seen plunging sales and profits. As such, the share prices of even profitable book retailers like Books-A-Million have been pushed to extremely low levels.

After reporting annual results last week, BAMM traded for just $70 million and has net debt of $20 million for an enterprise value of $90 million. But the company generates about $30 million in cash from operations per year! Even though this is a declining business, the price is so low that investors should make out like bandits if this rather steady cash flow stream is allocated back to shareholders.

But that's a big if, as a closer look at the company suggests that management has no intention of turning this company into a cash cow. Instead, the company continues to invest in its operations (for example, capex out-paces depreciation as the company has continued to open new stores this year), putting that money at risk.

Furthermore, instead of an orderly liquidation (as leases expire) of under-performing assets, the company appears to be trying to transform itself to stay relevant to customers. Since book sales are down, the company is allocating more space to toys, games and electronic accessories. Value investors would probably rather have the cash.

This situation is unlikely to change. The Anderson family controls the company as they own more than half of the outstanding shares. They likely have a strong attachment to the business (started by Clyde W. Anderson as a news stand in 1917!) that they consider more important than maximizing shareholder value. In addition, the family has a number of financial dealings with the company that give the family incentives to grow rather than shrink the business. For example, the company buys more than $20 million of goods annually from a supplier owned by the Andersons. Furthermore, the Andersons lease a number of buildings (including the company's executive offices) to the company.

Despite the tone of this post, in no way am I suggesting that the plan to keep growing this business isn't going to work. It very well may, and the Andersons have run the company well enough such that they have earned the right (based on the company's relatively strong financial position, especially compared to its peers) to give it a shot. But in a declining business, it is risky to keep investing in the business, and value investors don't like risk.

If management was furiously buying back this company's shares, this would be a low risk situation with "value" written all over it. But based on the anticipated intentions of management, this is a situation that value investors may want to avoid.

Disclosure: No position


tedk81 said...

Terrific writeup.

So many value blog writeups are poorly written, researched and thought out. All of yours are the opposite. You think well. Thanks for doing this!

Saj Karsan said...

Thanks, Ted! Much appreciated

tedk81 said...

Wow, this is weird, I leave a comment and tonight I'm looking at some deep value stuff and I came across GENC... it's interesting and then I search seekingalpha and see you own it as of a year ago.

Are you still long? I'm kind of on the fence here- it seems like their heavy insider ownership might actually be a net negative here if it's a family business and the guys running the show are goofy (kinda like the SYMS situation.)

And what's with this huge cash balance? That's where the "deep value" part of all of this stems from but with these guys content to just sit on it and invest it with some "investment adviser"- the huge cash balance seems excessive, and given that they've been growing it for years and sitting on it for years it seems like there's no catalyst to unlock this value.

Just wondering if you have an opinion. I think I'm going to have to pass for now, but the whole situation makes me scratch my head for sure.

Saj Karsan said...

Hi Ted,

I do still like it. I agree that family control is a negative here as well and reduces the likelihood of a catalyst, but it doesn't appear to me as though they are destroying value, like they are at SYMS.