Bed Bath & Beyond Below $30: Is the Housing Market to Blame?

Shares of Bed Bath & Beyond (BBBY) are now trading at $29.72. This is the lowest the stock has been in the last five years. I'm not a believer that the housing market is having a severe impact on its business. There is some impact, but it's easy to overstate. The company’s quarterly sales growth numbers have been pretty stable for the past three years, each quarter coming in around 10%-14%.

BBBY is a remarkably efficient company. Gross margins usually run in the low 40% range. Operating margins have slipped a bit from 15% to 13%, but that’s to be expected. Net margins are down from 10% to about 8.5%. Both are higher than they were during the run-up in housing prices.

There’s a big difference is a slowdown in earnings growth and losing a lot of money. Now let’s look at some of the homebuilders.

Lennar (LEN) will see its EPS drop from $8.32 two years ago to $-4.90 this year. DR Horton (DHI) will drop from $4.62 to $-2.27. KB Home (KBH) will drop from $9.53 to $7.61.

Basically, BBBY's return-on-equity has fallen from about 24% to around 20%, yet there shares have fallen by one-third. Compare 20% ROE to the 10-year T-bond that's now paying about 4%.

Comments

[heterocedas...:]

I also love BBBY. It is truly a great well managed company.

But you c'ant compare BBBY's slowdown situation with the housing stocks retrack situation because both corrected their stock prices also differently. Housing stocks are below their book value and BBBY is in its lowest PE levels ever...

You c'an also compare the yield of an ROE (20%) with a 10-year T-bond yield because they are simply not comparable. They would be comparable if you could buy the company for its book value. The right comparison is between the 10-year T-bond and BBBY's earnings yield, which is 7.33%.

2007 Nov 27 04:54 AM

[CrossProfit_:]

Eddy knows this - nice catch heterocedastico, yield not ROE, also include risk factor which puts the current price in line with current overall market sentiment and risk tolerance.

Long term though, trend should (most likely will) reverse.

CrossProfit

2007 Nov 27 07:19 AM

[Dan Jacome:]

no doubt the stock is cheap, but the top line has decelerated over the last 3 quarters: that has to be blamed on housing weakness.

great balance sheet, strong EBIT margins for a retailer, good target for LBO

We see the stock @ 40 in 2-3 quarters, but that is assuming the average consumer feels wealthier next summer, which is a "big if"

net net, there is a lot of systematic risk in this stock and not so much idiosyncratic risk in this stock: patient investors should get compensated further down the line.............

2007 Dec 01 01:17 PM