Would Buying Barnes & Noble’s Stock Here Be a Good Read?

With shares of Barnes & Noble (NYSE:BKS) trading at around $15.91, is BKS an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

As of right now, the Nook is everything for Barnes & Noble. Nook sales continue to climb. Last quarter, Nook sales were up 5.6 percent YoY. This isn’t exceptional, but it’s still positive. What is exceptional is that the Nook, Nook HD, as well as all Nook accessories, will now be sold at Wal-Mart (NYSE:WMT). This is tremendous news for the company and its investors, especially since it’s replacing the Amazon (NASDAQ:AMZN) Kindle in the Wal-Mart display. This might benefit consumers as well considering the Nook is known for offering a better screen, better battery life, and more memory potential. While that’s positive news, consumers are falling in love with the Google (NASDAQ:GOOG) Nexus 7. This is definitely an increased threat. However, Barnes & Noble has been bullied for years and never stops fighting regardless of the threat. For instance, Barnes & Noble is now making its way into other spaces. Beginning in early 2013, the company will offer video services for movies and TV shows.

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The basic point here is that Barnes & Noble is adjusting to the times. This company will not go the way of Borders, which sat on its hands and did nothing. On the negative side, Barnes & Noble has seen profit declines for two years. Margins are also negative, and overhead is an issue. Therefore, this won’t be an easy battle. The float is 32.70 percent short, but the short position has recently decreased, which might have something to do with the Wal-Mart news.

Let’s look at some important numbers.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for Barnes & Noble is low. It’s also lower than the debt-to-equity ratios for Amazon and Books-A-Million (NASDAQ:BAMM). The balance sheet is healthy.

Debt-To-Equity

Cash

Long-Term Debt

BKS

.28

$471 Million

$338.40 Million

AMZN

.35

$5.25 Billion

$2.68 Billion

BAMM

.46

$4.50 Million

$50.44 Million

 

T = Technicals on the Stock Chart Are Mixed

Barnes & Noble hasn’t performed well over the past three years, but the past year has offered a decent return.

1 Month

Year-To-Date

1 Year

3 Year

BKS

6.31%

9.91%

-1.09%

-13.95%

AMZN

11.17%

45.45%

32.85%

87.68%

BAMM

6.00%

9.05%

14.22%

-55.13%

 

At 15.91, Barnes & Noble is currently trading above all its averages.

50-Day SMA

14.98

100-Day SMA

13.89

200-Day SMA

14.44

 

E = Earnings and Revenue Are Inconsistent

Annual revenue has been improving while earnings have disappointed.

2008

2009

2010

2011

2012

Revenue ($) in billions

5.12

5.12

5.81

6.99

7.13

Diluted EPS ($)

1.23

1.32

.63

-1.31

-1.41

 

The previous quarter showed an improvement in earnings on a YoY basis.  

10/2011

1/2012

4/2012

7/2012

10/2012

Revenue ($) in billions

1.89

2.44

1.38

1.45

1.89

Diluted EPS ($)

-.17

.71

-.96

-.78

-.04

 

T = Trends Support the Industry

A lot depends on what industry we’re talking about. The Nook is performing very well and is about to steal more market share away from its competitors thanks to Wal-Mart. In regards to traditional book stores, the future doesn’t look as bright. On the other hand, there is an irony here. There will always be a market for people who want to read physical books. Therefore, there will always be a need for a book store. They might not be as large as the Barnes & Noble stores that can be found in your neighborhood now, but they will always be there. It would be a shame to see Barnes & Noble give up on their bookstores and then see increased demand for physical books. Don’t be surprised if Barnes & Noble did want Amazon did many years ago, which was go from selling only books to just about everything. Of course, this would change the main competitor from Amazon to Wal-Mart or Target (NYSE:TGT), but this is a possibility since they already have the space. Another possibility is that Barnes & Noble moves completely online, selling both the Nook, physical books, as well as many other products. This would greatly reduce overhead costs. Either way, Barnes & Noble is the underdog, but this isn’t the kind of underdog you should be emphatic about betting against. Barnes & Noble has proven to be flexible and adaptive.

Conclusion

We can look at many different positives and negatives for Barnes & Noble, but for a company that is constantly bashed by the public, you would think revenue would be in decline. However, revenue is steadily increasing, which is the most important factor of all. They can always cut costs to improve the bottom line. Also keep in mind that the balance sheet is healthy, which allows for more maneuverability.

Everything considered, this is an underdog worth betting on as a small, speculative play due to a lot of upside potential. Barnes & Noble is currently an OUTPERFORM.

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