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I was emailed a research note on Borders (BGP) by a reader and based on that, we can take closer look at FY 2009.

Deutsche Bank - Equity Research

Borders Group {Ticker: BGP.N, Closing Price: 6.55, Target Price: 6.00, Recommendation: Hold}

  • Key thoughts

Overall, this week's BGP results were mixed, but more positive than negative, in our view. Primarily, we can't overlook the positive P&L impact of continued cost cutting, especially if mgmt.'s confidence of hitting $120M over the next two years is realized. That said, top-line weakness and concerns on its timing and degree of recovery were highlighted by the 2Q reporting season, as BGP's results and BKS' 2H
plan disappointed, we believe.

At this point, our biggest concerns on BGP are [1] if/when will brick & mortar sales meaningfully improve, [2] the ongoing competitive threats from the internet and print digitization, and the effects on superstore sales/margins, [3] can substantial cost cutting be delivered, and without 'hitting bone' (hurting sales)? [4] BGP
announced its 'strategic alternatives process' on 3/20/08, but to date Paperchase (and the company) has not been sold. Notably, if Paperchase is 'put' to Pershing (among other reasons), expect a more modest selling price and potentially, further share dilution.

Cost cutting and liquidity were the big positives in 2Q, we believe.

  • Few changes to our model

We've tweaked our FY08/FY09 models, but we haven't yet run the full $120M in cost cuts through the P&L (we're at roughly half that). For FY08, we are now at -$0.14 from -$0.13, with FY09 at +$0.06 from
$0.03.


The bold section is the one that is important. On the earnings call, Borders was not only adamant it would hit the $120 million in savings, but said it expected to beat that. Now, with 60 million shares outstanding, and only $60 million in savings baked into the above estimates, the simple math tells us there is another $1 a share (or more) in potential earnings that are not being accounted for.

If the company hits the extra savings and gets $1.03 a share in earnings in FY 2009 and the stock trades at a comparable premium to Barnes & Noble (NYSE:BKS) of 12 times earnings, then we are looking at $12.36 a share for a price target.

Perhaps this is the reason the stock has raced past its $6 target?

Disclosure: Long BGP

Source: The Real Reason Borders' Stock Has Surpassed its Target