Why Barnes & Noble Could Offer A Huge Payoff

| About: Barnes & (BKS)

Summary

The company has weathered some rough waters.

Strategic partnerships have freed management to focus on core business.

Shares may have bottomed out.

Potential upside could be huge.

Not long ago, many would have said Barnes & Noble (NYSE:BKS) was in big trouble. True, the company's stock has struggled, currently trading near its lowest point in months, but this scrappy bookseller keeps on fighting. And with recent rumors Amazon (NASDAQ:AMZN) could possibly open more physical stores, maybe the doomsday prognosticators are wrong about the future of bookstores. If so, now might be the time to consider Barnes & Noble for your portfolio.

Adventures in E-Readers

Amazon first introduced the Kindle e-reader in 2007. It would be two years until Barnes & Noble released its competing Nook e-reader. Though B&N came late to the party, the entry into the e-book market positioned the company to outlast its main brick-and-mortar competitor, Borders, which filed for bankruptcy in early 2011.

B&N's foray into the e-reader market-as well as its subsequent move into the tablet market-was anything but smooth. Not long after signing a partnership with Microsoft (NASDAQ:MSFT), Barnes & Noble reported a billion dollar loss related to Nook. Just two years later, the company ended its deal with Microsoft and partnered with Samsung to manufacture Nook tablets. Frankly, the Samsung partnership made much more sense given Samsung's reputation as a quality tablet maker. The move also allowed B&N to remain in the e-reader business while allowing management to focus on driving traffic to its physical stores.

A Return to Its Core Business

After partnering with Samsung, B&N saw a small boost to same-store sales. However, Nook and its accompanying digital sales continued to be a drain on the company. Last month, B&N released its holiday sales figures, which were not exactly stunning. While comparable-store sales were up 1.6% during the nine-week period ending January 2, Nook sales only saw a 0.6% rise during the holiday season. And overall, Nook suffered a 25.8% drop in sales.

Turning the Page to the Future

Shares of Barnes & Noble took a dive following its December 2015 earnings announcement, which saw a lower than expected loss of $0.36 per share versus a consensus estimate of $0.31. We won't know B&N's Q3 earnings until next month, but so far, shares of B&N haven't recovered. In fact, shares hit a new 52-week low last week, bottoming out at $7.25 a share. That said, Zacks Investment Research is estimating Q3 earnings to be $1.02 per share, up from $0.93 per share reported the same quarter last year.

Bottom Line

Barnes & Noble has seen its share of problems, but analysts are forecasting a price target of $17. With shares currently trading around $8, this stock has a lot of room to grow. If you don't currently own B&N, now may be a good time to get in. Of course, buying ahead of the Q3 earnings announcement involves some risk, but if the company comes anywhere near the consensus price target, the payoff could be huge.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.