Four Reasons to Like Bed Bath and Beyond
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bed Bath and Beyond (NASDAQ: BBBY) is true to its name. It sells things that decorate the bedroom, bathroom and beyond such as light fixtures and table cloths. It even has pet supplies such as pet beds. I discovered that the stock of this company has declined 9% over the past three months and is trading at $67.24 per share as of close Aug. 28. As a value investor, that piqued my interest. As I was doing my research, I discovered that people love to buy things to decorate their homes. I also discovered four reasons I think this company will make a good long-term investment.
This Company Is a Cash Generating and Cash Hoarding Machine
Bed Bath and Beyond generates a lot of free cash flow. I like companies that can generate and keep cash. Its free cash flow grew 39% per annum between 2008 and 2011. The percentage of cash and short-term investments to stockholder’s equity is 45% as of the most recent quarter. This is excellent in my opinion.
On June 1, Bed Bath and Beyond announced a $100 million acquisition of privately held Linen, LLC. This was barely a drop in a bucket compared to the $1.7 billion that Bed Bath and Beyond has on their balance sheet. In the most recent quarter free cash flow declined 10% due to heavier investments in e-commerce and infrastructure such as equipment in new stores and software upgrades for internal technologies.
Their growth in free cash flow compares favorably to rival companies (see graph below). Bed Bath and Beyond’s 396% growth in free cash flow is four times, in terms of percentages, the free cash flow growth of Williams-Sonoma (NYSE: WSM), which is 89% over the past five years. Bed Bath and Beyond’s growth in free cash flow is 19 times the growth in free cash flow of Pier 1 Imports (NYSE: PIR), which was 19.43% over the past five years in terms of percentages.
PIR Free Cash Flow TTM data by YCharts
Excellent Return on Equity
The return on equity for Bed Bath and Beyond has been steadily increasing over the last three years (see graph below). A company that can make better use of its capital is a company I wouldn’t mind investing in. It also has higher return on equity than Williams Sonoma. Pier 1 Imports has a better return on equity, but its free cash flow growth is below that of Bed Bath and Beyond. My preference for Bed Bath and Beyond still stands.
BBBY Return on Equity data by YCharts
Very Low Total Debt to Equity Ratio
Bed Bath and Beyond has another big plus: It has a very low total debt to equity ratio, which currently stands at 50%. Most of this is accruals such as deferred rent, income tax payables, etc. There is no long-term interest bearing debt on their balance sheets. This is refreshing after studying companies that have 200-300% in total debt to equity.
Decline in Stock Price Presents an Opportunity
Bed Bath and Beyond’s stock price has sunk 9% over the past three months as of this writing (see graph below). As a value investor, I believe this is a good opportunity to get in on this excellent free cash flow generator. Williams-Sonoma stock is up 13% and has a P/E ratio of 18. Bed Bath and Beyond’s P/E ratio is 16. Pier 1 Imports has the lowest P/E ratio of 12 but as I pointed out above they don’t have the free cash flow growth of Bed Bath and Beyond.
Conclusion
Given that Bed Bath and Beyond can generate cash and is able to keep that cash combined with low debt and increasingly higher return on equity tells me that this is a company with good fundamentals. The 9% decline in stock price has put the stock at a P/E ratio of 16 which represents a good entry point. I have even made an outperform caps call on the Motley Fool Caps. Remember, always do your research; that is the Foolish way.
stockdissector has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Bed Bath & Beyond and Williams-Sonoma. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.
