As it did for Mr. Micawber in David Copperfield, something keeps turning up for Barnes & Noble (NYSE:BKS), purveyor of bargain classics like the Dickens novel we are currently reading on our Nook.
Fiscal first-quarter results announced yesterday reinforce our opinion that the business without the Nook subsidiary, still on track to be spun off early in 2015, is sound and undervalued. On a day when the market was under pressure, Barnes & Noble shares rose almost 3% on news that the company's bottom line, though still under water, was going in the right direction.
Though near its 52-week high, Barnes & Noble stock is poised to move yet higher, in our view, once the market is assured that the Nook separation from the retail business will be accomplished. That notion received a boost with announcement of first quarter results.
First quarter consolidated revenues decreased 7.0% to $1.2 billion, compared with the year-ago period, with EBITDA coming in at $30 million versus $9 million a year ago. Cost cuts were the big story in the improvement, with some $13 million saved in a ramp down of Nook. The consolidated first quarter net loss was $28.4 million, or $0.56 per share, compared to a net loss of $87.0 million, or a loss of $1.56 per share, in the prior year. The prior year included a valuation allowance against certain deferred tax assets of $41 million, or $0.70 per share.
Importantly, retail same-store sales were essentially flat in the quarter, suggesting that Barnes & Noble excluding Nook is poised to grow. In our view, the stock could move significantly higher as investors become increasingly convinced that the Nook separation will be accomplished at a valuation close to the $1.7 billion level suggested by the stakes of equity partners Microsoft and Pearson. As this conviction grows or ebbs, so will the stock price, in our view.
Excluding Nook, Barnes & Noble trades at just 3.4 times trailing 12 months' EBITDA by our calculations. Though the shares trade near annual highs, we still find them cheap.
Meanwhile, much is riding on the rollout of the Samsung (OTC:SSNLF) Nook tablet. The device marks Barnes & Noble's retreat from the hardware side of e-reading to focus on content delivery. We believe its success or lack thereof will have a significant impact on the spin-off of Nook, still expected to be completed early next year, management said.
Full disclosure: We carry our Nook everywhere but do not yet own a tablet device. At $179 and $200 worth of free content, we may be ready to spring for one.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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