“It’s an attractive business with high barriers to entry because of the physical presence on college campuses and an early movement into the digital space,” says Alex Fuhrman, an analyst with Craig-Hallum Capital Group. He sees “store growth, same-store-sales growth, and margin expansion” ahead. He has a Buy rating on the stock and a $25 price target.
Significantly smaller than its former parent with a $600 million market cap, Barnes & Noble Education has no debt. College bookstores have exclusivity on campus and sell high margin licensed apparel. The company also has invested in digital textbooks, depressing earnings, spending $26 million this year on its Yuzu division.
Barron’s also notes one successful investor with a large stake.
One of Barnes & Noble Education’s biggest fans is the successful and super-secretive hedge fund manager David Abrams. His Boston-based Abrams Capital Management now owns 16% of the company, roughly the same stake held by Barnes & Noble founder and chairman, Len Riggio. Abrams’ firm has been actively buying the stock in the open market at about current levels since the spinoff. Abrams couldn’t be reached for comment.
It’s not a surprise that Abrams didn’t comment, as the former Baupost employee and Seth Klarman protege does not talk to the press and is known to be unusually brief in his letters to fund investors.
Unlike traditional bookstore chains, the company is actually growing.
Barnes & Noble Education continues to increase its store count—736 now, up from 636 in April 2011—as colleges and universities see the benefit of outsourcing their bookstores. Textbook rentals, for instance, are easier for Barnes & Noble Education to manage with its network of stores and deep inventory.
The company typically offers a revenue-sharing deal to a university to run its stores plus investments in the stores and associated Websites. Barnes & Noble Education usually signs five-year deals, and it has an impressive renewal rate of over 93% in the past three years.
The company is the second largest college bookstore chain behind the privately-held Follett, but Barron’s points out a favorable comparison to a public comp.
At $600 million, Barnes & Noble Education also has about the same market value as Chegg (CHGG), which offers digital services to students and operates a textbook-rental business. Chegg, however, has only 20% of Barnes & Noble Education’s revenue and operates in the red. Unlike Barnes & Noble Education, Chegg benefits from an Internet valuation aura.
Finally, Barron’s had something nice to say about the company’s former parent, Barnes & Noble(BKS).
At about $13 a share, Barnes & Noble also looks inexpensive with a market value of about $1 billion. With a mature business and strong cash flow, B&N is focused on returning cash to holders with a dividend yield of 4.6% and a recently announced $50 million buyback program. Barnes & Noble Education is more of a growth story; it pays no dividend and isn’t repurchasing stock.
While college bookstores might not be the most exciting business, you don’t need a PhD to like Barron’s suggested return.
Disclosure: The author holds no position in any stock mentioned