I have followed Build a Bear Workshop (NYSE:BBW) since it first went public in late 2004, and I have owned it profitably for a brief period after the IPO. However, I had last sold shares in late 2005 and had lost track of the company during the past year. BBW first came public around $25 per share and had traded as high as $37 in the early days, so I was amazed to learn that the stock had dropped below $11 per share. At those prices, I snapped up 400 shares late last week. BBW is a retail concept with 375 Build a Bear Workshops worldwide. Parents bring their kids for an interactive make-your-own stuffed animal experience. My two girls love the place, and I constantly hear about how long it has been since we have last been to BBW. They have been branching into other similar concepts, including make-your-own Major League Baseball mascot in-stadium locations, Build a Dino stores and a virtual world, www.buildabearville.com.
Earnings were down about 18% in the first quarter to $0.32 per share, but the drop was less than analysts expected. For the year, the Company is expected to earn about $1.13 per share which would be about 10% growth from 2007. However, even if earnings are flat this year those would be decent results in the face of this recession.. The real growth for the Company will come internationally as they currently have 271 stores in the US with a total potential US market of 375-400 stores.
But while this is a decent growth story, the real story here is a ridiculously low valuation. At around $11 per share, the Company's enterprise value (market cap plus debt less cash) is around $180 million because the company has no debt and about $41 million of cash. Trailing 12 month EBITDA is $56 million, so the Company trades at less than 3.5x EBITDA.
As a private equity investor, I can tell you that it is very hard to find any companies trading for less than 4.0x EBITDA, let alone a company with $480 million in annual revenue and a branded retail concept. Even if this company was not going to grow revenue at all over the next 5 years, buyout groups will eventually start circling.
But coupled with its potential for store opening growth, once the current recession passes, I would venture to guess that someone will make an unsolicited offer for BBW during the next 12 months. I love companies with net cash (more cash than debt) because of the flexibility that it creates for management. In BBW's case, they have $41 million of net cash and are currently using that cash to buy back shares. What's more, if management used all $41 million of that cash plus borrowed debt equal to 1.0x EBITDA (a very conservative amount of debt), they could retire almost 50% of the outstanding shares. That is powerful flexibility and frankly a good defensive move by management (assuming they do not want to be acquired.
BBW is a perfect example of a pricing anomaly arising out of a recessionary bear market. The growth has evaporated because discretionary spending has disappeared. Institutional investors all pulled their money, and are searching for near-term returns. This exodus created a vacuum in BBW shares. Now the market has overcorrected to the downside and that smells like opportunity to me.
Disclosure: Author owns shares in Build a Bear Workshops