Books-A-Million - The Anderson Family Turnaround Opportunity

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Dec 06, 2014
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Books-A-Million Inc is a company with an interesting history run by the prominent Anderson family. Not known to many, BAMM is the second largest bookstore in the nation. Headquartered in Birmingham, Alabama, the 200 store operation has grown slowly since its founding in 1917. Going on the fourth generation and competing against technological change in the book industry, BAMM is presenting a potential opportunity.03May20171238151493833095.jpg

Ranked only one star in business predictability, it is certainly not the easiest company to value. A low ranking shows earnings are unpredictable and prone to substantial changes.

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Below is a chart of market cap and EBITDA. Notice the premium valuation BAMM was valued at compared to EBITDA in 2007. Although EBITDA declined slightly, the price of acquiring the entire company, or market cap, dropped much more. In fact, it is valued about twice EBITDA. If this company is able to withstand the current storm, the price paid for EBITDA is at a discount only seen a decade ago.03May20171238161493833096.jpg

The same is true with the price versus revenue. The Price to Sales ratio, or P/S ratio, is a visual depiction of how much one is paying for each $1.00 of revenue. At today's price, an investor in BAMM is paying $0.06 for each $1.00 of revenue. This price is due to recent quarters of negative earnings. Many are worried that the bookstore industry is going the way of the buggy whip. This could be true. However, if it is not, the price paid for revenue being lower than almost any time in history may present an investing opportunity.

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If we think about this company the way the Anderson family would, we must consider profit margins. Witnessed below, BAMM is not a high margin business. The net profit margin range is from a high of around 4% to today's -1.6%. The negative figure today does not look good, but could actually be an opportunity. As with many businesses during their growth phase, like Starbucks, negative margins are common. If growth is the case with BAMM, negative margins may only be temporary.03May20171238171493833097.png

If BAMM is able to sustain itself over the next few years it has a good chance of reverting to its historical net profit margin level of 1.5%. If this is true, since investors are only paying $0.06 for a dollar in revenue, the potential "owner's earning's yield" would be 25% per year, equivalent to a P/E ratio of 4. This estimation means BAMM may produce about $8.5M in profits. Paying only $33.9M for potentially $8.5M in profits is a large margin of safety.03May20171238171493833097.png

However, with such a low business predictability rank, asset based valuation models will certainly be used. Below is a chart of BAMM's Price to Tangible Book value. As with EBITDA and Revenue, the tangible assets are priced near the lowest levels in BAMM's history.03May20171238181493833098.png

Displaying tangible assets in another way, one can see the actual break down of what those assets are. With Total Assets at $302.7M, inventory of $199.6M is the largest asset the company owns. With a market cap. in orange at $33.9M, the price is less than both inventory and total Property Plant & Equipment. Buying below the level of assets often provides a margin of safety.03May20171238181493833098.png

Observe the Depreciation, Depletion, and amortization (DDA) rising as SGA, COGS and Revenue are moderately decreasing. If revenue is decreasing because business conditions are suffering that is one thing. However, if BAMM is trimming the non-performing stores, then perhaps once the trimming is over, the leaner company will be more profitable than before.03May20171238181493833098.jpg

Companies with the management willing to trim non-performing business segments quickly enough are often turn-around candidates. Management not willing to make the hard decisions and actively close stores can make the company go the way of Alco Stores, a discount variety store that recently entered bankruptcy. Also, some may believe the DDA to be a temporary, non-cash accounting manipulation.03May20171238191493833099.png

If the non-cash accounting expenses were taken away, BAMM earnings would be positive.

There are however, a couple major downsides to investing in BAMM today. First, BAMM is operating on extremely thin margins. Although there is nothing wrong with a low margin business, for they can have a strong moat because of this quality. Even though a low margin business could be the cost leader and have the ability to deter competition from entering the market, negative margins forever are not sustainable.03May20171238191493833099.png

The problem is if capital keeps being spent at current rates, it may hinder their ability to repay financial obligations. Yes, the expansion of Property Plant & Equipment could be a positive sign the company is investing in growth initiatives or investing in undervalued real estate. In fact, a company that grows organically through acquisitions of other failed competitors is often the conservative capital accumulator, just like Warren Buffett (Trades, Portfolio). BAMM has a history of acquiring other companies. Those familiar with the former Borders will find many of its old stores now owned by Books-A-Million. It is difficult, until after the fact, to determine the fate of any expansion campaign.03May20171238211493833101.png

The next potentially major flaw in the investing world is the bankruptcy system. Often a company is controlled by its creditors and suppliers. Even though shareholders are the "owners" of the company, it is the creditors and suppliers that are often the "puppet-masters" pulling the strings. Occasionally, you will have a scenario where the creditors want the equity portion of the company. The only way for them to do this is through a debt-for-equity exchange. This exchange is often conducted in bankruptcy, where former shareholders get nothing. What makes it more difficult is if those creditors or suppliers are also the Anderson family.

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It would not be difficult to negotiate a favorable prepackaged bankruptcy plan when management may just happen to be on both sides of the table. The chart below depicts long term debt and other liabilities. It does not depict who that money is owed to.03May20171238221493833102.png

Finally, the most common scenario with an undervalued company is the risk of a buyout. A buyout sounds wonderful, but could actually be horrible. What often occurs is after a major drop in price, the company gets a tender offer to buy all shares outstanding. If management gets to keep their job or is promised a large bonus they will certainly take the bait. As with the case with Hastings Entertainment, you will be forced to sell your shares. Once out of the position, it is the acquirer that reaps the benefits of the undervalued equity, not you.

With respect to the managment of this corporation, the Anderson family has had generations of success. They are honorable for their contributions to the University of Tennessee and employing 5,500 associates at their stores. Witnessed in the chart below, the fewer shares outstanding means the Anderson family percentage of the business is growing.03May20171238221493833102.jpg03May20171238231493833103.png

Perhaps the most interesting observation is the history of insider transactions. This could be the opportunity that swings in investors favor. An analyst does not have the ability to get inside the minds of management, for it would be insider trading. However looking at the chart below one will find the transactions of company management.03May20171238231493833103.png

From this information, truth may be revealed. At first glance when one observes a $3,090,500 insider sell one would get nervous. That is until the enterprising investor noticed who those shares are being sold to.03May20171238241493833104.jpg

From one generation to the next, the Anderson family continues to hold the reign at Books-A-Million. If they are bullish on the future of BAMM, perhaps other investors might want to be too.

Thanks to Gurufocus for providing the interactive charts and insider transaction information.