Should You Buy the Dip at Barnes & Noble Inc.?

Barnes & Noble Inc. shares have plummeted since top shareholder Liberty Media decided to dump most of its 17% stake. This could be a good time for long-term value investors to step in.

Apr 7, 2014 at 2:05PM

Last week, media conglomerate Liberty Media (NASDAQ:LMCA) announced that it had sold the vast majority of its stake in bookseller Barnes & Noble (NYSE:BKS). With its largest shareholder bailing out, it's not too surprising that Barnes & Noble shares have tumbled in the last few days.

BKS Chart

Barnes & Noble 1-Week Stock Chart. Data by YCharts.

Investors should generally be wary of companies where major shareholders are selling. That's especially true when they may have inside information -- and Liberty Media has held two seats on Barnes & Noble's board.

But Liberty Media's decision to reduce its investment in Barnes & Noble does not necessarily imply a lack of confidence in the company's strategy. As a result, the dip may have created a good buying opportunity.

Liberty Media and Barnes & Noble
When Liberty Media first invested in Barnes & Noble several years ago, it was mainly a bet on the company's ability to compete with Amazon.com (NASDAQ:AMZN) in the fast-growing e-book market with its Nook line of e-readers.

Nook Hd

Barnes & Noble's foray into the tablet market doesn't look so smart now.

For a while, that seemed like a good strategy. But in the last year or so, the e-book market's growth has slowed dramatically. Meanwhile, Barnes & Noble has been locked in a costly price war with Amazon.com and other e-reader and tablet manufacturers.

Today, Barnes & Noble's traditional retail and college bookstore business segments are more promising than the Nook business. As a result, Barnes & Noble is now de-emphasizing the Nook business to some extent. This change in strategy made Barnes & Noble more of an outlier in Liberty Media's investment portfolio, which is primarily oriented around digital media.

Liberty Media decides to leave
Barnes & Noble's shifting strategy thus may have been reason enough for Liberty Media to sell. As a result, I beg to differ with my Foolish colleague Alex Dumortier, who wrote last week that "there is no way to interpret this as anything but a vote of no-confidence with regard to the bookseller's long-term prospects."

But there's a second reason why Liberty Media may have been looking to monetize its Barnes & Noble stake. Liberty Media Chairman John Malone has been a vocal proponent of consolidation in the cable TV market. With cable M&A activity heating up, Liberty Media may be looking to free up cash to bid on cable TV assets that could come on the market this year.

The retail business still looks pretty good
Through the first three quarters of its current fiscal year, Barnes & Noble has posted pretax income of $54 million. That came in the face of a Nook segment EBITDA loss of more than $160 million. This is a testament to the continued strength of Barnes & Noble's retail business.

Images

Barnes & Noble's retail business remains stable and quite profitable.

If Barnes & Noble can simply eliminate the red ink from the Nook business, it would be very profitable relative to its market cap of just over $1 billion. To do this, the company has slashed Nook division expenses -- focusing on profitability over growth. Barnes & Noble is also outsourcing production of new Nook-branded tablets so that it will no longer carry the inventory risk associated with building tablets.

To be fair, the retail business is still declining in the face of competition from Amazon.com, but at a very manageable rate. Barnes & Noble expects to close about 20 stores a year over the next decade, which would cut its store count by about 30% excluding college bookstores (or by 15% including the college stores) over that time frame.

If this downsizing rate is enough to maintain Barnes & Noble's retail profit margin -- and so far that seems to be the case -- the company will still have plenty of scale in 10 years. Moreover, between now and then it would generate enough cash to reward shareholders generously through dividends and buybacks.

Foolish final thoughts
Barnes & Noble may not be the right investment for Liberty Media anymore, but it could be a good opportunity today for patient, long-term investors. Barnes & Noble is still losing money at this point, and it needs to complete the rationalization of the Nook business to allow the retail and college segments' earnings to flow down to the bottom line.

But if Barnes & Noble can at least get the Nook business to breakeven in the next year or two, it would allow the rest of the company to shine. I'm adding Barnes & Noble to the list of stocks I'm watching, and if the stock continues to retreat, I plan to put some money to work with this turnaround story.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Adam Levine-Weinberg is short shares of Amazon.com. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com, Barnes & Noble, and Liberty Media. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers