Barnes & Noble Valuation Case Study

There are opportunities to learn all around us.  The recent announcement of Microsoft’s $300 million investment in the Nook–Barnes & Noble’s eReader provides a reference point for valuation.

Barnes & Noble (BKS) Case Study Materials

BKS and MSFT Agreement 8K April 27 2012 What valuation can you derive from MSFT’s purchase price?

BKS 10Q March 8 2012 The most recent 10-Q. Combine with the 10-K to value BKS on your own.  BKS 10K April 30 2011

The Amazon Letter discusses the Kindle: Amazon Letter to Shareholders 2011

Try to think about how you would value BKS. If you struggle, then look at the case study materials below, then return to the financial statements. Don’t become discouraged.  The research report below isn’t perfect (lacks a full competitive analysis of the different businesses), but the report does do a good job in showing you how the author reached a valuation. You may disagree with the assumptions, but you know what they are.

When you read of a public transaction for a company or part of a company, you have a reference point to test your valuation skills. Good luck!

Valuation of Barnes & Noble

Barnes & Noble Case Study

10 responses to “Barnes & Noble Valuation Case Study

  1. On the first pass, this is what I get:

    MS’s investment in NewCo of 300mil for 17.6% values the company at 1.7045Bil, or 30.12/sh

    EV for BKS is approx 3.6 bil which is also approximates Total Assets
    1.1029 market cap + debt and contractual obligations – excess cash
    19.49x56588k + 2.5313 -(quick version for excess cash .95 x 59429000 = 56457550)
    This gives a whopping 64 EV/sh. Definitely not sure about this. I need to read more. 500pages+ to go.

    A couple of things:
    Should I use long term debt of 313mil or all the debt obligations. I was surprised how much revenue bks makes at its stores. If it didn’t have to pay so much for its leases and space, it would be alright.

    Here in Singapore, BKS shut its doors.

    Speaking of which, hey valueprax ,you are also here aren’t you? Want to form a CSI study group?

    Whatever people may say about MS, they do have a phenomenal track record for timing entries into a product space (Explorer etc). Move in when the streets are littered with the bodies of early entrants.

    Another interesting current opportunity to study competition using the Competition Demystified lens is watching what Nokia is trying to do to try and turn itself around. Nokia didn’t follow into the new space with touchscreen and it lost market share. Now it wants to shed its Vertu business. It’s surprising how slow and lost the company seems.

    • You are correct–but I have not carefully reviewed all the docs. I posted, but you can google the Wall Street Journal or NYT and they have reported the price paid there.

      Use all potential long-term (over one year) debt like Pension obligations; bring back any off-balance sheet obligations, etc.
      The concept is that money has to pay off debt obligations before shareholders–so debt is added while excess cash is subtracted to reach enterprise value.

      A study group is a great idea if you find the interest. I can’t give out people’s email without permission, but you can always email me at and I will forward on your email.

      Good luck.

  2. Thank you John.

    There’s a slight error in my calculation for excess cash that I want to point out in case it messes up anyone trying to learn.
    It should be .05 x 59429000 =2971450 and not .95 x… for the quick way to get excess cash as you pointed out in a previous post.

    This is what I found for a more precise way to get excess cash (courtesy of J. Tham CFA):

    Net income
    + Depreciation
    + Amortization (n)
    + Investment in market securities (n-1)
    – Cash on hand (n)
    – Accounts Receivable (n)
    – Inventory
    + Accounts Payable
    + Cash on hand (n-1)
    + Accounts Receivable (n-1)
    + Inventory (n-1)
    – Investment in assets
    -Loan principal payment (n)
    -Dividends (n)
    = Net Cash to Invest

    Is this how one should actually go about figuring out excess cash? Such precision as you mentioned before may not be productive use of time. I guess it depends on the case.
    JG’s FCF from You Can be a Stock Market Genius is almost the same NI+D+A-CAPEX.

    When NI or Cash flow is negative, do we normalize it over the past few years (given some assumptions?), and still try to value, or use other asset based methods, or a combination of methods to arrive at ballpark figure?

    • Thanks for posting your analysis of how to estimate excess cash. The model determines excess cash by the needs of working capital. Some businesses like DELL, for example, have negative working capital since customers pay BEFORE they pay their suppliers to build a computer for the customer. Don’t forget that you can’t get your hands on that excess cash so look at management’s prior skills in using cash. I go for simple is best. Give or take a few percent I deduct excess cash and ball park Enterprise value, since you are looking for opportunities where you can drive a truck through the gap between price and value.

      Yes, you normalize. Graham uses about 10 years of history.

      I can do a post on Graham’s method when we get to valuation after Comp. Demyst. Remind me.


  3. I started with the case study initially since I am a newbie to value investing. What troubles me is his sum of parts valuation of the NOOK business at 1x Sales while it loses money. I understand it’s R&D, etc but that doesn’t seem like sound “value” investing to me?

    Additionally, I have an issue with the following statement: “The physical retail store presence is a large competitive advantage for the Nook that BKS has been able to leverage to grab share in this fast growing market”
    While a few sentences ago, “BKS is closing 20-30 stores annually or 3-4% of their store base.”

    So due to physical presence NOOK is doing well, but their reducing their physical presence.

    I do need some help though, the author mentions FY EBITDA of the RETAIL biz as ~300MM. In the 10K however, it shows Operating Profits for 52 weeks ending May 2010 as 180MM, and in the 10Q for 39 weeks ending Jan 2012 as 159MM. Both not even close to 300MM, what am I missing other then Non-Operating income which we should prefer to leave out right? Thanks!

    • Have you added back D&A? If that doesn’t answer your question, let me know and I will look at the financial statements. I haven’t had a chance to do this case.

      I agree the statements are contradictory/confusing. Compare his valuation of the Nook to what MSFT paid. Of course, MSFT is a strategic buyer so they can pay the highest price. Investors in the Nook are looking to the future, so you are speculating UNLESS you obtain that option for a low to no price. The author might mean BKS is shedding poor performing stores, but their core store base will help in the sales. The key will be what content can they offer their customers on the Nook compared to competitors. Typically new companies (MOOK) will show losses/negative free cash flow as they build out their operations ahead of future sales. Certainly, you don’t have much history to go on. The beauty of it is–you can always pass–if it ain’t clear or feel right to you.

      This exercise get you thinking of the different parts of the business; you may strongly disagree with the author’s assumptions–no problem. Then go the next step and figure out what is a fair price or if it is too unknowable, walk away.

      Good post.

  4. Just noticing BKS complete round trip since announcement.

  5. Dear Nakul:

    No wonder pilots train in simulators. A video plane crach beats a real one anyday. Stay safe.

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