Team Members: Seth Nitschmann: seth.a.nitschmann@ttu.edu
EJ Quilter-Whitley: Edward.j.quilter-whitley@ttu.edu
Ricky Wegner: ricky_weg@hotmail.com
Jing Wang: jing.wang@ttu.edu
Conway Hwang: cons3@hotmail.com
April 28, 2005
1
Table Of Contents
²
1. Executive Summary
5
2. Business and Industry Analysis
8
2.1 Business and Industry overview
8
2.2 Five Forces Model
8
2.2.1
Rivalry Among Existing Firms
8
2.2.2
Threat of New Entrants
11
2.2.3
Threat of Substitute Products
11
2.2.4
Bargaining Power of Buyers
12
2.2.5
Bargaining Power of Suppliers
12
2.3 Trends
13
2.4 Revenues
14
2.5 Key Success Factors
16
2.6 Conclusion
17
3. Accounting Analysis
17
3.1 Key Accounting Policies
18
3.2 Accounting Flexibility
19
3.3 Strategy Analysis
20
2
3.4 Quality of Disclosure
23
3.5 Qualitative
23
3.6 Quantitative
24
3.7 Potential Red Flags
24
4. Ratio Analysis & Forecast
25
4.1 Financial Ratio Analysis
25
4.2 Sustainable Growth Rate
26
4.3 Time Series Trend
27
4.3.1
Financial Ratios
27
4.3.2
Liquidity
28
4.3.3
Profitability
29
4.3.4
Profitability Analysis
29
4.4 Cross Sectional Analysis
30
4.4.1
Liquidity Ratios
30
4.4.2
Profitability Ratios
32
4.4.3
Capital Structure Ratios
34
4.5 Liquidity
35
4.6 Profitability
36
3
4.7 Capital Structure
37
4.8 Forecast Analysis
38
4.8.1
Income Statement
38
4.8.2
Balance Sheet
41
4.8.3
Statement of Cash Flows
43
4.9 Conclusion
43
5. Valuation Analysis
44
5.1 Valuation Preface
44
5.2 Methods of Comparables
45
5.3 Intrinsic Valuation Method
45
5.3.1
Cost of Capital Estimation
45
5.3.2
Free Cash Flows
50
5.3.3
Discounted Residual Income
51
5.3.4
Abnormal Earnings Growth
52
5.3.5
Summary of Results
53
6. Recommendation
54
7. Sources
56
8.
Appendix
57
4
Barnes & Noble (BKS)
Company Valued
Investment Recommendation
stock ticker and exchange
SELL
Date of valuation 4-11-05
$34.86
EPS forecast
52 week price range
$24.77 - 37.58
FYE
2004
2005
2006
Revenue (2004)
4.87B
EPS
1.7
1.83
1.68
2007
1.59
market capitalization
2.41B
AEG
0.05
0.01
-0.28
-0.21
industry
shares outstanding
70.27M
your co
average
Valuation Ratio Comparison
Dividend yield
N/A
3 month avg daily trading volume
percent institutional ownership
$16.59
ROE
9.73%
ROS
8.81
15.56
10.13
3.61%
Valuation
Estimates
Est. 5 year EPS growth Rate
Ke estimated
20.22
71.40%
Book value per share(mrq)
Cost of Capital Estimates
Trailing P/E
Forward P/E
Actual Current Price (April 1, 2005)
Beta
0.811
Ke
$34.19
Ratio Based Valuations
5.64%
P/E Trailing
20.21
P/E Forward
15.55
PEG Forward
Dividend Yield
Published Beta
Kd
WACC
0.557
1.22
N/A
M/B
0.0725
0.054
Intrinsic Valuations
Discounted Dividends
$36.92
Residual Income
$15.44
Abnormal Earnings Growth
$15.44
Long-run residual income perpetuity
5
N/A
Free cash flows
1.0 Executive Summary
Recommendation – Overvalued Security
We believe the current market price for Barnes and Noble (BKS) is
overvalued. We feel this way because two of the three intrinsic valuation
models we used stated that Barnes and Noble was significantly overvalued.
Both the residual income and free cash flow models shows that Barnes and
Noble is priced to high.
Current Financial Position
Barnes and Noble for the past five years have had steadily increasing net
income. Even with the increasing of total liabilities, the increasing of total
revenue has been able to offset the growing debt.
Current Strategy
Barnes and Noble current strategy is to help them self by expanding the
current book market thus increasing their own market share. Too get this
accomplished Barnes and Noble will keep expanding their flagship stores to
more neighborhoods across the country. Also, with each stores well trained
management aware to their ever changing the surroundings only the most
marketable books will be sold in each area. Along with that, well researched
and highly visible locations Barnes and Noble to continue to grow and be a
house hold name.
6
Risk
Barnes and Noble has minimum risk due to the somewhat clam retail book
industry. With the beta of 0.557, Barnes and Noble is significantly less risky
than the market as a whole.
Valuation
Based on Barnes and Noble’s valuation models, the company’s stock price is
overvalued. Using abnormal earnings growth and residual income model, we
arrived at a target price around $16.00 per share. Right now, Barnes and
Noble’s stock is trading at a price of $35.00 per share which we came to a
conclusion that it is overvalued.
Competitors
Barnes and Noble is the leading bookseller in the country, with that being
said, Barnes and Noble must still be aware of other competitors in the
market. A few of Barnes & Noble’s largest competitors are Borders Group,
Inc., Amazon.com, and Book-a-Million. For Barnes and Noble to stay in the
market, the company would need to increase their diversity. Examples of
this are Barnes and Noble’s current market share in the video game, DVD,
and music cd industry.
7
2.0 Business and Industry Analysis
2.1 Company and Industry Overview
Barnes and Noble is the largest bookseller in the country. Other than
selling books, Barnes and Noble also owns and operates game stop, a video
game store, and entertainment software stores. This project is designed to
analyze Barnes and Noble in relation to its other competitors in the industry.
We plan on doing this by using the five forces model which includes current
competitors, new entrants, alternative products, customer bargaining power,
and supplier bargaining power.
2.2 Five Forces Model
2.2.1 Competitive Force One: Rivalry Amongst Existing Firms
Barnes and Noble is currently one of the top companies in a highly
competitive market. The companies that they compete with are not only just
in book stores but on the internet also.
When trying to find out were there is a competitive advantage Barnes
and Noble does separate themselves in certain ways. Everyone is selling the
same books just different ways. Were Barnes and Noble separates
themselves is by selling video games, DVD’s, computer software, and Music.
8
Barnes and Noble has been getting away from cyclical sales by being
more diverse in what they sale. Instead of just having bulk sales at the
beginning of a semester with books sales, they sale things you will need
throughout the year. Since the window for selling books is not that big they
have to compete with discount. Barnes and Noble currently takes anywhere
from 20 to 30 percent off books.
The current competitors in this market are Amazon.com, Books-AMillion Inc, Borders Group Inc, and other small business in the industry.
They are also in competition with mass merchandisers stores such as WalMart and Costco. Another market they are competing with are specialty
retail that offer books in special subject areas. So to sum it all up Barnes and
Noble is competing with anyone that sales books, music, DVD’s and, etc.
Now, to compete with internet based companies, Barnes and Noble is in
agreements with AOL, MSN, Google, and TM. They are hoping that these
high traffic areas will drive people to Barnes and Noble. (See Appendix 2.1)
9
BKS
AMZN
BAMM
BGP
AMZN = Amazon.com Inc
BAMM = Books-A-Million Inc
BGP = Borders Group Inc (MI)
Industry = Retail (Specialty)
10
2.2.2 Competitive Force Two: Threat of New Entrants
The threat of new entrants of the retail book industry is fairly low. Big
firms such as Barnes and Noble, Borders, Books-A-Million, and
Amazon.com are the major competitors in the business today. For this firm
to build revenue, it is important for them to establish an economy of scale.
New entrants hardly ever have a chance to compete with big players such as
Barnes and Noble, Amazon.com, Borders, or any other established retailers
because they may have to force their prices down which puts pressure on
profits in the long-run. Also, Barnes and Noble, Borders, and Amazon.com
have first movers advantage because early created firms such as those three
will have a guaranteed cost advantage over the new entrants.
2.2.3 Competitive Force Three: Threat of Substitute Products
The threat of substitutes in the book store market is reassembly low.
One reason there is not much of a market for substitutes in this industry, is
that there are no exact substitutes. The threat of substitutes depends of price
and relative performance of competing products. The closest thing to book
stores is television, Internet articles, and radio which cannot compare
directly in price, or performance. The only cost for television and radio is the
one time purchase price for the product, and cost for internet articles can be
11
as little as your monthly subscription for the internet. The only threat from
the substitutes is the customer willingness to switch is so easy anybody can
do it from the comfort from their own home.
2.2.4 Competitive Force Four: Bargaining Power of Buyers
Two factors that determine the bargaining power of buyers are price
sensitivity and relative bargaining power. Books being Barnes and Nobles
main product leave them with low differentiation and low switching costs
for the consumers. Competitors such as discount book stores, used book
stores, and websites such as Amazon.com offer the consumers with an
alternative for the same product at the same or cheaper prices. This leaves
the buyer with high price sensitivity. Because there is a high number of
book suppliers and discount book stores along with low switching costs,
consumers have high relative bargaining power. In all, consumers in the
book industry and of Barnes and Noble have high bargaining power.
2.2.5 Competitive Force Five: Bargaining Power of Suppliers
Barnes & Noble is a company that sells books, magazines, music,
video games, and entertainment software either in store or through the
internet. However, most of its revenues are come from the book sells. On the
supply side, first, Barnes & Noble stocks over 100.000 unique book titles in
12
stores and over 1 million unique titles in warehouse, which is more than any
of it’s competitors do. Also, its huge inventory contains over 40,000
publisher imprints. The last marketing element is the lowest price it offers to
customers. After all, Barnes & Noble gains supply bargaining power by
offering books that can not be found anywhere else at prices that can not be
matched.
2.3 Trends
The importance of companies to identify the trends of their
customers is of the utmost importance. Barnes and Noble have done this by
studying a community prior to opening a store and adjusting its title
selection accordingly. Also, another example of how Barnes & Noble
studies trends is after a store opens, mangers have instructions for father
adjusting the selection to better fit the lifestyles and beliefs of the local
community, and adding local writers to the shelves. The company also
thinks the location of its stores in relation to its customers strengthen its
position in the market and increase its franchise value in the eyes of the
customer.
13
2.4 Revenue
Barnes and Noble is the nation’s largest bookseller. As of January 31,
2004 Barnes and Noble operates 842 bookstores and 1514 video-game and
entertainment-software stores. During fiscal 2003, the company’s share of
the consumer book market was approximately 16 percent giving them their
main source of revenue at almost 4.8 billion dollars. The vast majority of
this revenue comes from in store sales and the rest coming from internet
sales. Other revenue comes from their 64 percent ownership in Game Stop.
With consumer spending in the book market expected to increase at a
compound annual growth rate of 2.8 percent, from approximately 18.8
billion dollars in 2002 to approximately 21.6 billion dollars in 2007, future
revenue is looking bright.
14
15
2.5 Key Success Factors
Barnes and Noble is well know and very successful in the book selling
department of their stores. What people don’t know are the other things they
have done to make them so successful. These things include DVD’s, CD’s,
computer software, and video games. They have extended store hours and
put their department in high traffic places to make it more convenient. To
compete in the internet industry Barnes & Noble also started to sell their
book’s online to help better compete with Amazon and Books-A-Millions
Inc.
Barnes and Noble’s ability to compete in all these fields and still be so
widely known is amazing. There brand is well known and internet
companies are to trying to jump on board. Another key success factor has to
how Barnes & Noble has the ability to compete with discount book stores by
cutting prices. When competing with Wal-Mart and Costco you have to be
able to compete with cheap books. Barnes and Noble take 20 to 30 percent
off books sold in their stores.
In conclusion, Barnes and Noble is one the most highly respected
books stores there is. They are growing everyday not only with acquiring
more assets, but also by expanding their costumer base. They have opened
up to the internet with AOL and MSN to compete in the internet market
16
which is expanding rapidity. Barnes and Noble to this day, is making it
easier for anyone to get a book, DVD, CD, computer software, or video
game. Barnes and Noble has a very high customer satisfaction rate and
makes it as convenient as possible for customers.
2.6 Conclusion
Barnes and Noble is a widely recognized company that has continued
to grow and gain market share. They are very competitive and at the top of
the book market. After looking at the five forces model, it is easy to
understand how Barnes and Noble stacks up so well to its competitors.
Barnes and Noble’s ability to recognize current market trends has kept them
in touch with the local communities and has gained them stronger customer
loyalties. With an increasing revenue stream Barnes and Noble looks to
continue to grow and expand.
3.0 Accounting Analysis
In this section we discuss both qualitative and quantitative method to
evaluate the credibility of Barnes and Noble’s financial statements. This
consists of key accounting policies, degree of accounting flexibility, strategy
analysis, quality of disclosure, and potential “red flags.” Undo accounting
17
distortions was omitted because all of the financial statements appear to be
transparent and not misleading.
3.1 Key Accounting Policies
The Company’s fiscal year is comprised of 52 or 53 weeks, ending
on the Saturday closest to the last day of January. Barnes and Noble’s
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements require management to make estimates and assumptions in
certain circumstances that affect amount reported in the accompanying
consolidated financial statements and related footnotes. Barnes and Noble
consider cash and cash equivalents to be any short-term, highly liquid
instruments purchased with an original maturity of three months or less.
Revenue from sales of the company’s products is recognized at the time of
sale. Sales returns are recognized at the time returns are made.
Barnes and Noble use several methods of accounting for their
merchandise inventories. These are stated at the lower of cost or market.
The cost is determined primarily by the retail inventory method on the firstin, first-out or FIFO basis. They use this method for 77 percent and 82
percent of the Company’s merchandise inventories as of January 31, 2004
and February 1, 2003. Merchandise inventories of GameStop, Barnes &
18
Noble.com, and Calendar Club represent 19 percent and 12 percent of
merchandise inventories as of January 31, 2004 and February 1, 2003.
These inventories are recorded based on the average cost method. The
remaining merchandise inventories are valued on the last-in, first-out or
LIFO method.
Barnes and Noble’s property and equipment are carried at cost,
minus the accumulated depreciation and amortization. For financial
reporting purposes, the straight-line method of depreciation is used for the
assets estimated useful life. Barnes and Noble use different methods strictly
for tax purposes. For instance, maintenance and repairs are expensed as they
are incurred. On the other hand, improvements and remodeling costs are
capitalized. Barnes and Noble reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets .
3.2 Degree of Accounting Flexibility
As a bookseller company, Barnes and Noble is the only one with a
fully operational multi-channel strategy – with retail locations from coast to
coast and an online subsidiary, Barnes and Noble.com. In that case, it has an
19
average degree of flexibility in choosing different accounting policies and
estimates in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements. For example, as the
balance sheet shows, Barnes and Noble has a large amount of accounts
receivable recorded each year from its retail price stores, which means a low
likelihood that materially different amounts would be reported. Also, it has
an option on how to depreciate or amortize intangible assets, such as
goodwill. During 2002, the company adopted statement of Financial
Accounting Standards No. 142, “Goodwill and other Intangible Assets.”
(2003 Annual Report) Changes in market conditions, among other factors,
could have a material impact on testing unamortizable intangible assets.
According to the accounting policies we described above, there could be
some difference between actually and estimably results by using of
assumption as to future uncertainties. In addition to innovations in retailing,
Barnes and Noble has also expanded its approach to bookselling and the
products it offers through its self-publishing program, that’s why it chooses
FIFO in comparison to LIFO.
3.3 Strategy Analysis
Barnes and Noble’s accounting policies compared to competitors
such as Amazon and Books-A-Million are very similar. Barnes and Noble
20
Inc. is engaged in the retail sale of trade books (generally hardcover and
paperback consumer titles, excluding educational textbooks and specialized
religious titles), mass-market paperbacks (such as mystery, romance, science
fiction and other popular fiction), children’s books, off-price bargain books
and magazines.
Barnes and Noble overall follows GAAP but uses non-GAAP for
financial measures. Non-GAAP policies provide consistent and comparable
measures to help investors understand Barnes and Noble’s current and future
operating results.
On February 4, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative Instruments and
Hedging Activities” (SFAS 133), as amended, which requires that all
derivative instruments be recorded on the balance sheet at their fair value.
The impact of adopting SFAS 133 on the Company’s consolidated financial
statements was not material.
Under an agreement ending February 2, 2003, Barnes and Noble
uses an interest rate swap as a derivative to modify the interest
characteristics of its outstanding floating rate long-term debt, to reduce its
exposure to fluctuations in interest rates. Barnes and Noble’s accounting
policy is based on its designation of such instruments as cash flow hedges.
21
Barnes and Noble do not enter into such contracts for tentative purposes.
The swap has a notional amount of $55,000. The effective portion of the
gain or loss on the derivative instrument is initially reported as a component
of comprehensive loss in Barnes and Noble’s Statement of Shareholders’
Equity, and later reflected in earnings in the period in which the related
transactions occur. In the first quarter of 2001, Barnes and Noble recorded
an unrealized loss of $(649), net of taxes. No incompetence was recognized
in the first quarter of fiscal 2001 related to these instruments. Also, other
expenses of $5.4 million in the first quarter of 2001 was primarily due to
$4.5 million in legal and settlement costs associated with the lawsuit brought
by the American Booksellers Association (ABA) and $1.0 million in equity
losses in iUniverse.com. Other expense of $2.5 million in the first quarter of
2000 was due to equity losses in iUnivere.com.
Merchandise inventories are stated at the lower of cost ore market.
Cost is determined using the retail inventory method on the FIFO basis for
82 percent, 83 percent, and 82 percent of Barnes and Noble’s merchandise
inventories. The remaining merchandise inventories are valued on the LIFO
method. All cost are recorded based on the average cost method.
22
3.4 Quality of Disclosure
The beginning of Barnes and Nobles most recent 10-k (2004),
describes a book selling giant. Not only is the report in-depth, it has more
than adequate information concerning the inner workings o the corporation.
It also shows Barnes and Noble’s ownership in three other companies that
are all at the top in their respected markets. The report goes on to describe,
in detail, many of the different sectors that have to do with each of their
companies and Barnes and Noble. Also, the 10-k states that their have been
no changes or disagreements on accounting and financial disclosure.
3.5 Qualitative
Merchandising and marketing is one of the sectors of Barnes and
Noble that is described in-depth. The 10-k states that before a store opens,
Barnes and Noble studies the community and other demographics so they
may better customize the title selection with offerings from the area local
publishers and authors. Expansion is another topic that is described in detail
and is very interesting to many potential investors because of the predicted
growth. According to Veronis, an Industry Forecast company, U.S.
consumer spending on books is predicted to jump from $18.8 billion in 2002
to $21.6 billion in 2007. The 10-k also includes a section on industry
background covering e-commerce. This section explains why
23
BarnesandNoble.com is in a very hot and ever expanding market to feather
increase in revenues for Barnes and Noble.
3.6 Quantitative
The 10-k provides adequate financial statements that include the
three major statements: Income statement, balance sheet, and the statement
of cash flows. The Income statement provided shows the basic multi-step
income statement that shows positive net income for the last three years.
The balance sheet also contains the basics, all of the company’s assets,
liabilities, and equity. To finish up with the statements, the statement of
cash flows contains a very precise outlook of how Barnes and Noble has
allocated its cash flows.
3.7 Potential Red Flags
When looking at the balance sheet, income statement, and statement
of cash flows there were no substantial changes or numbers indicating bad
accounting. The fourth quarter is not yet reported and when observing the
third quarter everything looked good. After going through the 10-k and 10-q
we have come up with the conclusion that Barnes and Noble is very
transparent with their information and do not try to obscure or hide anything.
As far as undoing accounting distortions there were not any red flags.
24
4.0 Ratio Analysis and Forecast
The purpose of this section is to analyze the financial conditions of
Barnes and Noble and to forecast their company’s financial conditions for
the next ten years. In addition to computing Barnes and Noble’s ratios we
will also find competitors ratios along with the industry average. By doing
this we can find out where Barnes and Noble stands compared to the rest of
the industry and where Barnes and Noble needs improvement.
The ratio analysis will allow us to dissect Barnes and Noble ratio by
ratio to find out their weaknesses and their strengths. This helps us to create
underlying information for investors and shareholders with information that
is readily available for the public. This will allow us to find trends in each
of the ratios and to also help with forecasting. It helps with forecasting so
that we don’t over guess the rates at which they are growing.
4.1 Financial Ratio Analysis
The goal of financial analysis is to assess the performance of the firm
in the context of its stated goals and strategy. Ratio Analysis involves
assessing how various items on a firm’s financial statements relate to one
another. Ratio Analysis of Barnes and Noble’s past and present success will
provide a solid foundation for predicting the company’s future performance.
25
In this section, you will find previous annual data filed with the SEC used to
perform a ratio analysis of Barnes and Noble. This Information will be used
to find various liquidity, profitability, and capital structure ratios which will
then allow for an evaluation of Barnes and Noble itself and as well as its
main competitors in the book and game industry. Of Barnes and Noble’s
competitors, Amazon.com, Books-A-Million, and Borders Group Inc. have
been chosen to represent their market.
In the ratio analysis we will use several methods to compare each of
the numbers. First, will be the time-series comparison in which ratios for the
firm will be compared over several years. Next, will be the cross-sectional
comparison. Here ratios of Barnes and Noble will be compared to the ratios
of the other firms in the industry, such as the firms listed in the above
paragraph. Last, we will use this information to do a financial statement
forecasting.
4.2 Sustainable Growth Rate
The Sustainable Growth rate is used to evaluate the firm’s ratios in a
comprehensive manner. They use the “SGR” to find out their growth
without having to change its profitability and financial policy. Also, keep in
mind that the “SGR” is used only as a benchmark at which a firm can be
evaluated. After calculating the SGR we found that, Barnes and Noble on
26
record have shown no dividend payouts. So, we have come to the conclusion
that the Return on Equity equals the SGR.
4.3 Time (Time Series) Trend
4.3.1 Financial Ratios
2004
2003
2002
2001
2000
Current Ratio
1.52
1.53
1.40
1.56
1.35
Quick Asset Ratio
0.38
0.32
0.18
0.12
0.09
Accounts receivable TO
3.71
4.64
7.39
7.05
6.10
128.83
132.42
131.78
142.63
162.01
7.92
8.04
10.80
8.41
10.94
Liquidity Analysis
Inventory TO
Working Capital
Turnover
Profitability Analysis
27
Capital Structure Analysis
Debt to Equity Ratio
0.46
0.52
0.67
1.09
0.76
Debt Service Margin
0.87
0.83
1.03
0.23
0.58
16.40
12.28
6.76
2.50
9.77
Times Interest Earned
4.3.2 Liquidity
Overall, Barnes and Noble’s Liquidity is positive analysis. Our
Current Ratio has shown some ups and downs but has been very consistent
for us. After analyzing is Quick Asset Ratio we have found that they are not
in good standing as far as their credit goes. This shows that their Ratio’s are
very low but are improving year by year. Our Accounts Receivable is very
low, and shows that Barnes and Noble are bad about turning their credits in
to cash. Their Inventory stays in storage to long but this could also have to
do with how seasonal book selling is. Their biggest inventories is college
books that are really only sold twice a year. An increase in sales and
working capital has caused a decrease in working capital.
28
4.3.3 Profitability
Gross profit on sales has been consistently in the positives. Expense
ratio also has a positive affect along with net profit margin. These are the
things that we used to look at the efficiency in are company. So our
efficiency was positive with only one drop in Net Profit Margin in 2001.
Our asset turnover over the years has been positive and has increased
almost every year or stayed consistent. This positive production in the Asset
Turnover shows that they can support their sales volume. For every Dollar
invested in 2004 they had 1.70 of sales. Thanks to the Asset Turnover
staying consistent and net profit Margin increasing it has been favorable to
their Return on Asset ratio. (See Appendix 4.1)
4.3.4 Profitability Analysis
Barnes and Noble capital structure shows that they get their assets
efficiently. Except for one year in 2001 their debt-to-equity ratio has been
under 1. This shows that they have been doing a good job with their equity
financing. In 2004 Barnes and Noble had .46 in liabilities for every dollar of
equity. Barnes and Noble Times Interest Earned have shown that their
29
earnings have almost doubled from 2000 to 2004. This also proves that
Barnes and Noble is creditworthy, because their Times Interest Earned is
incredibly higher in 2004 then in 2000. (See Appendix 4.2)
4.4 Cross Sectional (Benchmark) Analysis
4.4.1 Liquidity Ratios: (See Appendix 4.3)
Current Ratio
Barnes & Noble has a higher current ratio than Borders Group, but
lower on compared to Books-A-Million. Even the trend has been slightly
decreasing over the past five years and the company still has enough assets
to cover their current liability. Although they have enough if they keep this
trend they are going to see themselves falling quickly.
Quick Asset Ratio
All three companies are doing poorly on the quick asset ratio, since
the number is below one. Barnes & Noble has fallen down a lot after year
2001, and so do competitors. However, Barnes & Noble still keep declining
while both competitors are arising in 2004. This is saying that the value of
Barnes and Noble is going down and that they do not have enough assets to
pay off their liabilities.
30
Days Supply of Receivables
Days supply of receivables, compare to Borders Group and Books-AMillion, Barnes & Noble’s number has appear decline since 2002, which is
would not indicated any trouble for the company. This does tell us that
compared to the rest of the industry that we are better are at collecting are
accounts receivable. Barnes and Noble turn receivables into cash fast.
Days Supply of Inventory
Days supply shows how much inventory the company is holding in
term of days. Barnes & Noble is holding fewer inventories than both
competitors, and it is very efficient in managing their inventory. This tells
us that not only are we lower then every one else but we also do not hold are
inventory in stock very long. In the other words, it is good to have a low
Days Supply of Inventory ratio.
Working Capital Turnover
Barnes & Noble seem in the mid position between two competitors,
lower than Borders Group, but higher than Books-A-Million. The number is
not stabled and appears upward in 2004. It is better to increase their current
assets in order to make the working capital turnover smaller. This tells us
31
that Barnes and Noble have a lot more current liabilities then current assets.
This in any business is no good and they need to improve in the area.
4.4.2 Profitability Ratios: (See Appendix 4.4)
Gross Profit Margin
The variation between Barnes & Noble and Borders Group, on the
gross profit margin is very small and there is no real advantage for anyone.
Barnes and Noble are leading their competitors in this category and just need
to keep improving. Although Barnes and Noble is not that high they still are
improving and that is a positive for this ratio.
Operating Expense ratio
Operating expense ratio, the higher the percentage, the less efficient a
company is running. As the chart shows above, Barnes & Noble has the
lowest ratio. Barnes and Noble are not too bad with keeping cost down.
This also has a lot to do with selling books and they don’t make them.
Net Profit Margin
In 2003, Barnes & Noble and Borders Group were falling together.
Especially, Barnes & Noble turn out a negative number, which means they
32
don’t have very much money in hand. This means that Barnes and Noble
are selling more then they are collecting. This usually means that there is a
lot of accounts receivable out there.
Asset Turnover
Barnes & Noble has higher asset turnover than the other two
companies before 2003, and staying fallen below Borders Group. Barnes
and Noble are fine in that their sales are exceeding their totals assets. This
means that we have enough resources to produce are volume.
Return on Asset
Barnes & Noble has shown a decrease line in 2003 than its
competitors. After that, it became arising from -0.02 to 0.05 in 2004, the
highest number over past four years. These numbers show that their
operating efficiency is not very good at all. This also shows that almost
every year their profitability has deteriorated. Finally Between 2003 and
2004 it made a significant jump and hopefully is still on the rise.
33
Return on Equity
The rate of return on equity chart show that Barnes & Noble has about
the same fluctuations as their return on asset for the past five years. They
still have decreased number in 2003 and increased in 2004. This shows that
the owners’ profitability was not that high and finally took a turn for the
better in 2004. Overall, this shows that the owners interest in total assets in
not very high.
4.4.3 Capital Structure Ratios: (See Appendix 4.5)
Debt To Equity Ratio
There has been a slight increase in this debt to equity ratio over the
past five years that means debt has become a larger portion of total financing.
Compared to its competitors, Barnes & Noble has the lowest ratio while it’s
arising in 2003. This shows that Barnes and Noble have had enough
owners’ equity to pay for their total liabilities.
Debt Service Margin
From 2000 to 2002, Barnes & Noble has large number of debt service
margin than its competitors. During year of 2003, it suddenly fallen from
34
1.03 to 0.23, which their ability to make the payment is decreased. They
have only been at more then one dollar per long term debt in these past five
years. They don’t have the adequate amount of cash to pay installments on
their long term debts.
Times Interest Earn
Barnes & Noble trends downward slop from 2000 to 2003 show that
they are doing better than Borders Group, while Books-A-Million stay
relatively low from year to year. Since 2004, Barnes & Noble may have
sufficient money to cove the interest payment on their long term debts.
Besides the increase between 2003 and 2004 they are being very consistent
and have improved most of the time.
4.5 Liquidity
Liquidity refers to how much of a company’s assets are, or are easily
converted to cash or cash equivalents. A company without enough liquidity
can have problem of paying its short-term debts or finding enough cash to
finance unexpected business opportunities.
Overall, Barnes & Noble has a positive liquidity analysis. The current
ratio has changed slightly over the past five years. Through the quick asset
35
ratio is another liquidity ratio that indicates a company’s ability to quickly
payoff current assets if the need arises. Typically this number should be
greater than 1; however, as you can see from the table above, it trend to
increased each year, but still above one. The accounts receivable turnover
ratio and days supply of receivables are close related. For Barnes & Noble,
as the accounts receivable turnover ratio rises the days supply of receivables
goes down. Also, inventory turnover and days of supply inventory looks
stable for recently years. The inefficient working capital has shown sales has
been decreased since current assets and current liability have not changed
much, but still stays positive.
4.6 Profitability
Gross profit margin is gross profit divided by sales, and it is stable as
the table showed us. Operating expense ratio is stayed on 22%, stable as
same as the gross profit margin, except year of 2001 has the highest
number—25%. Net profit margin tells what percentage of sales was retained
by the company as net income. Obviously, it sharply increased from – 1% in
2001 to 3% in 2004, and this is good indicator for Barnes & Noble. A higher
number of asset turnover suggests that the company is producing large sales
volume in relation to its assets. Barnes & Noble’s asset turnover has been
going up and down from 2000 to 2004. It increased from 1.44 in 2000 to
36
1.86 in 2003, and decreased to 1.70 in 2004. Return on asset and return on
equity both have increased over past five years. Positive return on equity
shows the profitability of the owner’s interest in total assets in Barnes &
Noble.
4.7 Capital Structure
Barnes & Noble experienced a decline in debt to equity in 2004 from
2001, which is a good indicator for the company. It dropped from 1.09 in
2001 to 0.46 in 2004. Also, this decrease indicates that debt has become a
smaller proportion of total financing. The debt service margin ratio
illustrates how well a company is able to cover the yearly payments on their
long tern debt. Barnes & Noble has an unchanged debt service margin as the
table shows. The increase in time interest earned ratio indicates that Barnes
& Noble’s income from operations is more adequate to cover required
interest charges.
37
4.8 Forecast Analysis
4.8.1
Income Statement
In order for us to forecast Barnes and Noble’s financial information,
we needed to figure out the percentage change from one year to the next.
The best tool to forecast the future is the past. By saying past, we used
Barnes and Noble’s 10k income statement starting from 1999 to 2003.
To start off, we reviewed our income statement and selected sales,
cost of goods sold, gross profits, and net earnings to forecast. Based on what
we have looked up on finance.yahoo.com, it said that in the year of 2004,
Barnes and Noble’s sales would increase by 3.9%. The website also said that
in the year 2008, the company would take an 8.9% hit. After that, we came
together and decided that because of what happened, we predicted the
percentage sales for the next seven years. As you can see in the table 1
below, we predicted that sales would grow at an average of 12.5% after 2006.
Table 1
2004
2005
2006
2007
2008
$6,159,300,525
$6,251,690,033
$5,695,289,620
$6,549,583,063
$7,335,533,030
38
2009
2010
2011
2012
$8,289,152,324
$9,449,633,650
$10,583,589,688
$11,641,948,657
2013
$12,689,724,036
The next list of numbers that we forecasted are cost of goods sold and
gross profits. To get the gross profit, we took the dollar amount from the
cost of goods sold for the past five years and average them out. We came up
with a growth of 11% per year of goods sold. To calculate an 11% growth
rate for 2004, we took the cost of goods sold of 2003 and multiplied it by
1.11. We did this step for the next 10 years. After calculating the dollar
amount for the forecasted years, we took the sales and subtracted cost of
goods sold to get the gross profit. Table 2 below is an example of what we
did.
39
Table 2
2003
2004
2005
2006
$5,951,015,000
$6,159,300,525
$6,251,690,033
$5,695,289,620
sold)
$4,323,767,000
$4,712,906,030
$5,231,325,693
$5,231,325,693
Gross Profits
$1,627,248,000
$1,446,394,495
$1,020,364,340
$463,963,927
Sales
(Cost of goods
The last set of numbers we forecasted for the income statement is net
earnings. Net earnings stayed mostly constant in the past but in year 2000 it
dipped down into the red of a recorded net loss of 52 million dollars. This
was because of the dot com bubble burst. Other than that, we took the other
four years and came up with an average of a 4% growth rate pre year. We
took that 4% and multiplied it from the year 2003 to get the forecasted dollar
amount for 2004. We executed the same step for the next 10 years to achieve
our forecasting number. Table 3 below will show you a little example of
what we did.
40
Table 3
Net Earnings
2003
2004
2005
2006
$151,853,000
$157,927,120.00
$164,244,205
$170,813,973
151,853,000 * 1.04 = 157,927,120
157,927,120 * 1.04 = 164,224,205
164,224,205 * 1.04 =
170,813,973
4.8.2 Balance sheet
Forecasting is a very difficult and highly sensitive process. When
using such large numbers, such as the ones in the Barnes & Noble balance
sheet, even a few percent off can grow into a hundred million dollar mistake.
That is why we have based our forecast growth rates on Barnes & Nobles
past numbers, because like mentioned earlier the best predictor of the future
is the past.
To help forecast the fourth quarter numbers for the 2004 balance sheet,
a lot of attention was paid to the 2003 numbers. At the end of the third
quarter on the 2003 balance sheet total assets, total liabilities, total equity
were all a few percent less than the 2004 numbers. So by comparing the
41
2003 year end total to the third quarter numbers of 2004 I was able to
estimate that it would grow by roughly 8 %. As demonstrated in table 4.
Table 4
2003
2004
Total current assets
$2,193,489,000
$2,456,707,680
Total Liabilities
$2,247,635,000
$2,427,445,800
$1,259,659,000
$1,360,431,720
Total shareholders
equity
The main focus of the balance sheet forecasting was on the must
essential, and highly visible of the balance sheet accounts. I feel that total
current assets and total non-current assets which together equal total assets is
a vital element of the overall value of the balance sheet. Largely based on
the previous five years of Barnes & Noble’s Balance Sheets there is a slow
growth of total assets. A conservative sustainable growth rate 8% was used
in forecasting the total assets for the next ten years. A similar philosophy
was used in the forecasting of all the liabilities and equity sections of the
balance sheet. Please see forecasted balance sheet located in appendix at end
of report.
42
4.8.3 Statement of Cash Flows
The forecasts on our statement of cash flows are derived from the
estimates used on the income statement and balance sheet. Using the growth
rates and patterns on these statements, we were able to calculate and forecast
the future cash flows for Barnes and Noble. Therefore, all of the forecasts
are in accordance with the other financial statements and gave us a better
overview helping us make the best estimates possible. Potential errors may
arise from fluctuations or miscalculations in the other financial statement
forecasts which would carry over to the statement of cash flows. Other
fluctuations may be a result of certain or rare economic trends
4.9 Conclusion
After analyzing Barnes and Noble, with their ratios and the industries,
we have come to the conclusion that Barnes and Noble has some advantages
and some disadvantages in the industry. The ratios have also told us that
they are very competitive and are one of the big dogs in the industry. As the
fall and spring semester in college roll around, Barnes and Noble is at the
top. They have done things like expand outside of just walking in and
buying books to just turn on your computer. Things look bright and Barnes
and Noble if they keep improving at this rate will always be on top.
43
5.0 Valuations Analysis
5.1 Valuation Preface
After forecasting financial statements for Barnes and Noble, for the
next ten years, we then tied them into are calculation models to estimate the
value of equity. We are going to base these values on assumptions of future
performance.
The main reason for making these valuations, besides the value of the
company, is to find out if our stock is an attractively priced security. We
will judge the weights of the valuations by which model comes closest to the
market price of are company. Even though one valuation might come closer
than another; the other valuations are still important to have a broad range of
variables. These values can also determine where we think most of the
value of the firm lies, either in the assets already in place, or in the Barnes
and Noble's future.
The valuation methods we will be using are the following: Method of
Comparables, Discounted Free Cash Flows, Discounted Residual Income,
and Abnormal Earnings Growth. We will not be using the Discounted
Dividends model further explained why later.
44
5.2 Methods of Comparables Valuation
The method of comparables valuation was performed using current
share prices and shares outstanding. This method requires that several close
competitors of Barnes & Noble be used to compute rations and then be
averaged. It is non-intrinsic model that is least reliable because it takes only
the competitions information and neglects all firm specific data. Also, the
method of the comparables valuation is not considered to be one of the most
accurate measures, as it can be seen by the range of values.
The P/E ratio conveys what price investors will pay for every dollar
of earnings. In this case, Investors are willing to pay $20.22 for every dollar
that the Barnes and Noble earn. The trailing P/E multiple implies that Barnes
& Noble’s stock, priced at $34.19. That is overvalued by $16.76, and the
P/B ratio implies the company overvalued by more than $0.84.
(See
Appendix 5.1)
5.3 Intrinsic Valuation Method
5.3.1 Cost of Capital Estimation
To estimate cost of equity (Ke), cost of debt (Kd), and the weighted
average cost of capital (WACC), we took historical prices from
45
finance.yahoo.com and plugged those numbers in an excel spread sheet. To
get the percentage of total liabilities, we divided each liability by the total
liability before MI. The table below shows the example of how we got the
percentage of total liabilities for accounts payable.
Table 1
Percent of Total
Liabilities
1/31/2004
Current Liabilities:
Accounts payable
$858,068,000
42.47%
Accrued liabilities
$583,773,000
28.89%
$1,441,841,000
71.37%
Long-term debt
$300,000,000
14.85%
Deferred income taxes
$170,066,000
8.42%
Other long-term liabilities
$108,441,000
5.37%
Total current liabilities
total liab before MI
$2,020,348,000
We then looked on Edgar scan and obtain the computed interest rate.
We took each interest rate and multiplied it by the percentage of total
liabilities to get the value weighted rate. Table 2 below shows an example of
what we did. Barnes and Noble have an abnormally high percent of
46
liabilities because currently they are opening many new locations across the
United States.
Table 2
Computed
Percent of Total
Interest Rate
Liabilities
Value Weighted Rate
0.0588
42.47%
0.02497
0.026
28.89%
0.00751
71.37%
0.0525
14.85%
0.00780
0
8.42%
0.00000
0.063
5.37%
0.00338
After obtaining the entire value weighted rate, we took the sum of
those numbers and came up with our cost of debt.
The way we achieve the cost of equity is by using the CAPM model
and the CAPM series excel sheet. (As seen below)
47
Ke = CAPM = Rf + B( Rm – Rf )
Ke = .03207 + 1.38(.03)
Ke = 7.346%
Average
Beta
Estimate
R-Squared
0.810873
8.0744970%
Estimated Ke
Risk
Yahoo
Free
Published
Rate
Beta
0.03207
5.640%
Estimated Cost of
Debt
4.37%
short horizon
0.2867
Historical
Estimated Ke
4.067%
R^2
0.806%
shorter horizon beta
48
0.577
Market
Risk
Premium
0.03
1.3794812
Estimated Ke
7.346%
R^2
5.455%
The way we obtained the weighted average cost of capital, we calculated the
value of debt and the value of equity of the firm.
Vd / Vd + Ve = Value of Debt of the firm
2,247,635,000 / 2,247,635,000 + 1,259,659,000 = .64
Ve / Ve + Vd = Value of Equity of the firm
1,259,659,000 / 1,259,659,000 + 2,247,635,000 = .36
WACC = Vd / (Vd+Ve) (Kd) + Ve / (Ve+Vd) (Ve)
WACC = .64 (.0437) + .36 (.0746)
WACC = .0548
49
5.3.2 Free Cash Flows
After computing and evaluating the Free Cash Flows we come to the
conclusion that, Are market price is smaller then are intrinsic value of the
stock. This method carries the more weight in the overall valuation of
Barnes and Noble. We used year 2013 cash flow to calculate the terminal
value. Our forecasts have shown an increasing trend and the future looks
bright.
Are estimated share price when using this model is 36.92. We used a
weighted cost of capital of 5.4%. After we calculated that are intrinsic
values was higher then the market price we assumed that either a higher
weighted cost of capital, or a negative growth to come closer to the intrinsic
value. (See appendix)
Discounted Dividends
When trying to calculate this model we came to the conclusion that it
was impossible. The reason why is, because Barnes and Noble does not pay
dividends. This is the main factor in not trying to compute the Discounted
Dividends model.
50
5.3.3 Discounted Residual Income Model
Sensitivity Analysis
g
Ke
0
0.02
0.05
0.1
0.03
$51.57
$104.52
N/A
N/A
0.05
$26.53
$30.15
N/A
N/A
0.07
$16.30
$15.69
$12.50
N/A
0.09
$10.93
$9.74
$5.74
N/A
0.11
$7.73
$6.60
$3.51
$42.98
The discounted residual income model finds the companies estimated
value per share by using their cost of equity, which Ke= 7.25%. Our analysis
found an estimated price $15.44 per share compared to the actual price of
$34.38 per share, which the actual price was twice larger than the estimated
price. For this valuation method we conclude that the firm is overvalued,
because the actual price is higher than our estimated price. In order to
validate our assumption, we performed a sensitivity analysis compare other
possible cost of equity’s and growth rates. When growth rate equals 0,
increase 2% of cost of equity leads a large number decreases.
51
5.3.4 Abnormal Earnings Growth Model
Using the Abnormal Earning growth model the value of the firm’s
equity is expressed as the sum of its book value and discounted forecasts of
abnormal earnings. This model takes into account the present value of the
investment opportunities of the dividends paid to shareholders. It does not
include actual dividend payments (because BKS does not pay dividends),
but they are considered to be found in the earnings per share. The abnormal
earnings are computed as the earnings per share plus any dividend
investment opportunities. Afterwards the normal earnings are subtracted to
find any abnormal earnings. The abnormal earnings are then discounted
back and set up as a continuing perpetuity to find the value of each share.
This model can be found in the Appendix.
Using a cost of equity of 7.25%, this model gave us a present share
value of $15.44. This can be compared to the actual share price of $34.38.
Because Barnes and Noble do not pay dividends, it is hard to say how
effective and accurate this model actually is.
52
Sensitivity Analysis
g
0
Ke
0.02
0.05
0.1
0.03
$21.34
$21.34 N/A
N/A
0.05
$18.30
$18.30 N/A
N/A
0.07
$15.73
$15.73
$15.73 N/A
0.09
$13.57
$13.57
$13.57 N/A
0.11
$11.73
$11.73
$11.73
$11.73
Conducting a sensitivity analysis test showed that with Ke
equaling .03, gave the closest estimate to the actual share price. This
conflicts with our estimated Ke of .0725 which showed a value of
approximately 15 dollars per share. With no dividends being paid and our
cost of equity giving a considerably low price per share, we have concluded
that this method considers Barnes and Noble overvalued. We do not
consider this model to be a sufficient way of valuing the company and would
need further research, because of the absence of dividends.
5.3.5 Summary of results
The valuation models used to help find the estimated value per
share offer a comprehensive and in-dept picture into the inner workings of
Barnes and Noble. Based on the valuation models used, Barnes and Noble
53
is currently over valued in the residual income and abnormal earnings
growth models. While the discounted free cash flows offers a fairly
accurate depiction of the current market price being only about a point and
half above the price set by the market. Unfortunately, we were not able to
use the discounted dividends method because of the simple fact that Barnes
and Noble does not pay dividends. But, even without a full arsenal of
valuation methods; the valuation as a whole should be accurate and reliable.
The differences in the market price and what has been calculated
by our valuation models are most likely do to a couple of reasons. First, the
market is forever changing, so theoretically even with a perfect valuation of
a company; the next day if the market is open their will be a change in the
value of the firm therefore throwing off the model. Second, in the valuation
models used, forecasting numbers was necessary. When forecasting, the
possibility of human error always exist, whether it is in the estimated future
cash flows, our in the forecasted earnings per share. With that being said
we are very confident with what we believe is a slightly over valued firm.
6.0 Recommendation
Due to our confidence and in the strength of our valuation models,
we feel Barnes and Noble are over valued in the market. With two of are
three models used showing the company as over valued and the other one
54
as only slightly under valued that’s what we base this decision on. Even
with our recommendation of overvalued Barnes and Noble will continue to
grow in what seems to be the ever expanding world of internet sells. We
recommend selling Barnes and Noble.
55
7.0 Sources
1. Barnes and Noble homepage. www.barnesandnoble.com
2. www.barnesandnobleinc.com
3. http://finance.yahoo.com
4. http://edgarscan.pwcglobal.com
5. www.msnbc.com
6. www.ruetors.com
56
8.0 Appendix
2.1
DIRECT COMPETITOR COMPARISON
BKS
AMZN
BAMM
BGP
Industry
Market Cap:
2.44B
14.56B
159.33M
2.04B
657.85M
Employees:
40,000
7,800
2,700
15,000
4.35K
12.90%
33.80%
4.00%
6.20%
11.20%
6.55B
6.92B
434.61M
3.85B
953.73M
27.70%
23.15%
26.89%
27.70%
36.13%
519.86M
516.15M
21.10M
323.40M
80.76M
5.15%
6.36%
1.33%
5.73%
3.48%
158.04M
588.45M
2.36M
131.90M
32.58M
EPS (ttm):
2.032
1.386
0.131
1.652
1.00
PE (ttm):
17.05
25.75
74.35
16.43
22.10
PEG (ttm):
1.32
1.58
1.25
1.44
1.16
PS (ttm):
0.37
2.30
0.38
0.54
0.56
Rev. Growth (ttm):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Oper. Margins (ttm):
Net Income (ttm):
Finance.yahoo.com
57
4.1
DIRECT COMPETITOR COMPARISON
BKS
AMZN
BAMM
BGP
Industry
Market Cap:
2.44B
14.56B
159.33M
2.04B
657.85M
Employees:
40,000
7,800
2,700
15,000
4.35K
12.90%
33.80%
4.00%
6.20%
11.20%
6.55B
6.92B
434.61M
3.85B
953.73M
27.70%
23.15%
26.89%
27.70%
36.13%
519.86M
516.15M
21.10M
323.40M
80.76M
5.15%
6.36%
1.33%
5.73%
3.48%
158.04M
588.45M
2.36M
131.90M
32.58M
EPS (ttm):
2.032
1.386
0.131
1.652
1.00
PE (ttm):
17.05
25.75
74.35
16.43
22.10
PEG (ttm):
1.32
1.58
1.25
1.44
1.16
PS (ttm):
0.37
2.30
0.38
0.54
0.56
Rev. Growth (ttm):
Revenue (ttm):
Gross Margin (ttm):
EBITDA (ttm):
Oper. Margins (ttm):
Net Income (ttm):
Finance.yahoo.com
58
4.2
Profitability Analysis
2004
2003
2002
2001
2000
Gross Profit Margin
27%
27%
27%
28%
29%
Operating Expense Ratio
22%
22%
22%
25%
22%
3%
2%
1%
-1%
4%
1.70
1.76
1.86
1.71
1.44
Return on Assets
4%
3%
2%
-2%
5%
Return on Equity
12%
10%
7%
-7%
15%
Net Profit Margin
Asset Turnover
59
4.3
Current Ratio:
2000
1.52
BKS
1.47
BGP
1.8
BAMM
2001
1.53
1.42
1.83
2002
1.40
1.3
1.79
2003
1.56
1.19
1.82
2004
1.35
1.17
1.74
Current Ratio
2.00
1.80
Value
1.60
1.40
BKS
1.20
BGP
1.00
BAMM
0.80
0.60
0.40
0.20
0.00
2000
2001
2002
2003
2004
Years
Quick Asset Ratio
BKS
BGP
BAMM
2000
0.38
2001
0.32
2002
0.18
2003
0.12
2004
0.09
0.41
0.33
0.24
0.12
0.11
0.1
0.1
0.12
0.13
0.14
Quick Asset Ratio
0.45
0.40
0.35
BKS
Value
0.30
BGP
0.25
BAMM
0.20
0.15
0.10
0.05
0.00
2000
2001
2002
Years
60
2003
2004
Days supply of receivables
BKS
BGP
BAMM
2000
3.71
2001
4.64
2002
7.39
2003
7.05
2004
6.10
9.03
8.36
7.8
7.85
7.91
6.2
7.38
8.4
10.2
13.02
Days Supply of Receivables
14.00
12.00
Value
10.00
BKS
BGP
8.00
BAMM
6.00
4.00
2.00
0.00
2000
2001
2002
2003
2004
Years
Days supply of inventory
BKS
BGP
BAMM
2000
128.83
2001
132.42
2002
131.78
2003
142.63
2004
162.01
168.86
173.11
180.38
181.34
182.64
234.39
241.39
231.11
233.07
224.66
Days Supply of Inventory
300.00
250.00
BKS
Value
200.00
BGP
BAMM
150.00
100.00
50.00
0.00
2000
2001
2002
Years
61
2003
2004
Working Capital Turnover
BKS
BGP
BAMM
2000
7.92
6.80
4.41
2001
8.04
7.68
3.93
2002
10.80
10.10
4.23
2003
8.41
15.06
4.02
2004
10.94
17.61
4.3
Working Captial Turnover
20.00
18.00
Value
16.00
14.00
BKS
12.00
BGP
10.00
BAMM
8.00
6.00
4.00
2.00
0.00
2000
2001
2002
Years
62
2003
2004
4.4
Gross Profit Margin
BKS
BGP
BAMM
2000
0.27
2001
0.27
2002
0.27
2003
0.28
2004
0.29
0.28
0.27
0.27
0.28
0.28
0.24
0.23
0.24
0.23
0.23
Gross Profit Margin
0.35
0.30
Value
0.25
BKS
BGP
0.20
BAMM
0.15
0.10
0.05
0.00
2000
2001
2002
2003
2004
Years
Operating Expense Ratio
BKS
BGP
BAMM
2000
0.22
0.94
0.96
2001
0.22
0.95
0.98
2002
0.22
0.95
0.98
2003
0.25
0.95
0.98
2004
0.22
0.94
0.97
Operating Expense Ratio
1.20
1.00
BKS
Value
0.80
BGP
BAMM
0.60
0.40
0.20
0.00
2000
2001
2002
Years
63
2003
2004
Net Profit Margin
BKS
BGP
BAMM
2000
0.03
0.03
0.02
2001
0.02
0.03
0.03
2002
0.01
0.03
0.09
2003
-0.01
0.01
0.07
2004
0.04
0.03
0.01
Net Profit Margin
0.10
0.08
BKS
0.06
Value
BGP
BAMM
0.04
0.02
0.00
2000
2001
2002
2003
2004
-0.02
Years
Asset Turnover
BKS
BGP
BAMM
2000
1.70
1.51
1.61
2001
1.76
1.54
1.44
2002
1.86
1.56
1.5
2003
1.71
1.62
1.43
2004
1.44
1.57
1.41
Asset Turnover
2.00
1.80
Value
1.60
1.40
BKS
1.20
BGP
1.00
BAMM
0.80
0.60
0.40
0.20
0.00
2000
2001
2002
Years
64
2003
2004
Return on Assets
BKS
BGP
BAMM
2000
0.04
0.06
0.03
2001
0.03
0.07
0.01
2002
0.02
0.06
0.02
2003
-0.02
0.04
0.02
2004
0.05
0.06
0.03
Return on Assets
0.08
0.07
Value
0.06
0.05
BKS
0.04
BGP
0.03
BAMM
0.02
0.01
0.00
-0.01
2000
2001
2002
2003
2004
-0.02
-0.03
Years
Return on Equity
BKS
BGP
BAMM
2000
0.12
0.12
0.05
2001
0.10
0.12
0.01
2002
0.07
0.1
0.03
2003
-0.07
0.05
0.02
2004
0.15
0.13
0.05
Return on Equity
0.20
0.15
BKS
0.10
Value
BGP
BAMM
0.05
0.00
2000
2001
2002
-0.05
-0.10
Years
65
2003
2004
4.5
Debt to Equity Ratio
BKS
BGP
BAMM
2000
0.46
1.13
1.18
2001
0.52
1.20
1.50
2002
0.67
1.28
1.42
2003
1.09
1.39
1.37
2004
0.76
1.39
1.36
Debt to Equity Ratio
1.60
1.40
Value
1.20
BKS
1.00
BGP
0.80
BAMM
0.60
0.40
0.20
0.00
2000
2001
2002
2003
2004
Years
Debt Service Margin
BKS
BGP
BAMM
2000
0.87
0.38
0.38
2001
0.83
0.33
0.11
2002
1.03
0.41
0.25
2003
0.23
0.22
0.08
2004
0.58
0.30
0.12
Debt Service Margin
1.20
1.00
BKS
Value
0.80
BGP
BAMM
0.60
0.40
0.20
0.00
2000
2001
2002
Years
66
2003
2004
Times Interest Earned
2000
2001
16.40
12.28
BKS
23.63
4.93
BGP
5.23
2.01
BAMM
2002
6.76
4.34
2.45
2003
2.50
4.10
2.03
2004
9.77
9.28
3.28
Times Interest Earned
25.00
20.00
BKS
BGP
Value
15.00
BAMM
10.00
5.00
0.00
2000
2001
2002
Years
67
2003
2004
5.1
Method of Comparables
Forward
Trailing
P/B
Name
Symbol
PPS
EPS
P/E
P/E
ratio
PEG
Books-A-Million Inc
BAMM
9.03
N/A
12.74
N/A
1.12
1.02
Borders Group Inc
BGP
26.51
1.77
12.23
15.02
1.83
1.05
Barnes & Noble Inc
BKS
34.19
1.69
15.56
20.22
2.1
1.22
SUM
69.73
3.46
40.53
35.24
5.05
3.29
AVERAGE
17.77
1.77
12.49
15.02
1.47
1.035
68
5.2
Free Cash Flows
Free Cash Flow (to firm)
Banres and Noble
2004
2005
2006
2007
2008
2009
2010
2011
2012
$585,393,700 $673,202,755 $774,183,168.00 $890,310,643.00 $1,023,857,240.00 $1,177,435,826.00 $1,354,051,200.00 $1,557,158,880.00 $1,790,732,712.00
($310,955,645) ($311,266,601) ($311,577,867) ($311,889,445)
($312,201,335)
($312,513,536) ($312,826,049) ($313,138,875) ($313,452,014)
274,438,055 361,936,154 462,605,301
578,421,198
711,655,905
864,922,290 1,041,225,151
1,244,020,005 1,477,280,698
0.949
0.900
0.854
0.810
0.769
0.729
0.692
0.657
0.623
260377661.290 325799749.036 395083390.780 468685758.366 547100362.965 630860628.434 720543780.594 816775076.999
2003
Cash Flow from Operations
Cash Provided (Used) by Investing Activities
Free Cash Flow (to firm)
discount rate (5.4% WACC)
Present Value of Free Cash Flows
Total Present Value of Annual Cash Flows
Continuing (Terminal) Value (assume no growth)
Present Value of Continuing (Terminal) Value
Value of the Firm (end of 2003)
Book Value of Debt and Preferred Stock
Value of Equity (end of 2003)
Estimated Value per Share
4,165,226,408
1401594590.133
920,232,412
5,085,458,820
$2,247,635,000
2,837,823,820
36.92
Book Value Per Share
$36.92
Actual Price per share
$34.38
Ke
WACC
0.0725
0.0539955
69
5.3
Abnormal Earning growth
Abnormal Earnings Growth
Value
2003
EPS
DPS
1
2
2004
2005
2006
$1.70
$0.00
$1.83
$0.00
$0.00
$1.83
$1.82
$1.68
$0.00
$0.00
$1.68
$1.96
DPS invested at 7.25%
Cum-Dividend Earnings
Normal Earnings
Abnormal Earning Growth
(AEG)
3
4
Forecast Years
2007
2008
$1.59
$0.00
$0.00
$1.59
$1.80
$1.86
$0.00
$0.00
$1.86
$1.71
5
6
2009
2010
$1.92
$0.00
$0.00
$1.92
$1.99
$1.79
$0.00
$0.00
$1.79
$2.06
$0.01 ($0.28) ($0.21)
$0.15 ($0.07) ($0.27)
PV Factor
0.932
0.756
PV of AEG
$0.01 ($0.25) ($0.17)
$1.70
($0.58)
Core EPS
Total PV of AEG
Continuing (Terminal) Value
$0.00
PV of Terminal Value
Total PV of AEG
$1.12
Average Perpetuity
Capitalization Rate
(perpetuity)
Value Per Share
Ke
g
0.0725
pv
fv
0.0725
0
$15.44
15.716
Ke
Actual Price per share
$34.38
70
0.869
0.811
0.705
0.657
$0.12 ($0.05) ($0.18)
71
72