Thanks to a surprise move by activist investor Ron Burkle, shares of Barnes & Noble (BKS) had an unusually exciting day on Tuesday Feb. 2, running up to as high as $21 a share from the previous day's closing price of $18. But don't be fooled. The upswing isn't likely to last long, warn some pros.
In spite of the flurry, Wall Street remains unattracted to Barnes & Noble. Of the seven major analysts who follow the largest U.S. bookseller, none recommend buying the stock: Four are neutral and three advise selling it. Among those rating the stock a sell or underperform are Standard & Poor's, whose 12-month target price is $18; Goldman Sachs with a $17 target; and Credit Suisse with a $16 target. The stock closed on Feb. 4 at $18.89 a share.Burkle, whose Yucaipa Cos. owns 19% of Barnes & Noble's stock -- the largest outsider stake -- wants the company to get rid of its poison pill, or anti-takeover, provision that bars any investor from owning more than 20%. In a letter to Barnes & Noble's board of directors filed with the Securities and Exchange Commission, Burkle sought clarification on whether the founding Riggio family, which controls owns 27% of the stock, is exempt from the poison pill.
Burkle indicated his desire to raise his shareholdings to 37%. It was unfair, he said, that the Riggio family controlled 37% (including shares owned by management and directors) while no other investor could. The anti-takeover provision, he added, hurt the stock and penalizes "non-Riggio shareholders."
An Unlikely Gambit
Some investors are hopeful that Burkle's lament will trigger new interest in the stock. But one analyst warned against such a conclusion. "My gut instinct is that founder and Chairman Leonard Riggio and the board will secure enough votes to keep the poison pill in place, should Burkle choose to bring it to a vote at the annual shareholder meeting," says the analyst, who requested anonymity. "I don't think Mr. Riggio will want to relinquish power to an activist shareholder."
This analyst believes that, ultimately, the issue will die down, and Burkle will move on to find a new company to pursue. Burkle couldn't be reached for comment.
Some investors are betting on Riggio taking the company private, at about $23 to $25 a share. But again, most analysts aren't that optimistic. "While the [Burkle] announcement increases the perception this will occur, it's not a foregone conclusion," cautions David A. Schick, analyst at investment firm Stifel Nicolaus, in a note to clients. He rates the stock a hold. Barnes & Noble is cheap, he says, "if sales and margin trends can survive or grow from current levels."
Schick sees Apple's (AAPL) introduction of the iPad tablet computer further hastening e-reader adoption and reducing returns on bricks-and-mortar bookstores. Schick expects consumers over the long term to shift substantially toward e-readers, such as Amazon's (AMZN) Kindle, to the detriment of bookstores.
Unfavorable Long-Term Trends
Michael Souers, analyst at Standard & Poor's, who rates Barnes & Noble a sell, says because of the industry's maturity, sales will rise only modestly over the foreseeable future, despite the positive customer response to the company's ever-expanding assortment of self-published titles and improving online sales execution. He's concerned about the long-term secular trends, which include, he says, unfavorable price competition from electronic retailers and declining adult readership.
Souers also cites corporate governance issues at Barnes & Noble, which allowed the issuance of a poison pill without shareholder approval. And he isn't too positive on the company's earnings. He figures it will earn $1.19 a share in fiscal 2011 (ending Jan. 31), up from estimated fiscal 2010 earnings of 73 cents a share. But that's still down from fiscal 2009's $1.49. In fiscal 2008, Barnes & Noble earned $2.03 a share.
So for all the recent activity in Barnes & Noble's stock, it may just be a useful vehicle for nimble professional traders. As for long-term investors, analysts advise against losing sight of some disappointing fundamentals, such as narrowing operating margins and projected declines in same-store sales. Indeed, fundamentals should rule.
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