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