Should You Follow John Malone Out the Door at Barnes & Noble, Inc?

Media mogul John Malone and his Liberty Media empire have seemed to sour on their outlook for Barnes & Noble's future prospects, recently deciding to sell the vast majority of their shares. Should investors start looking for the exit signs?

May 1, 2014 at 8:30AM


Source: Barnes & Noble.

Times are tough for bookstore giant Barnes & Noble (NYSE:BKS), as evidenced by declining overall sales and uncertain prospects for its Nook unit. Once a bright spot, the Nook has struggled to maintain market share in the e-reader segment against more popular devices from technology giants Apple and (NASDAQ:AMZN). The latest bit of bad news was the sale by John Malone and his Liberty Media (NASDAQ:LMCA) empire of most of its sizable stake in the company, a move that sent Barnes & Noble's share price down by 10% in early April.

That said, Barnes & Noble is the lone remaining bookseller with a national domestic footprint that turns a profit in its stores, albeit at a declining rate. This implies that there is some value in its brick-and-mortar units. So, after losing roughly a third of its value over the past five years, is the company a good bet?

What's the value?
With the demise of Borders in 2011, Barnes & Noble sits alone atop the retail bookstore business, with a little more than 660 stores across the country. The company is also the king of the college bookstore segment, operating a similar number of stores that cater to approximately 4.6 million students. 

Unfortunately, being the top dog in a declining business hasn't done a whole lot for Barnes & Noble's investors. Shareholders have suffered negative cumulative returns over the past few years, due to shrinking margins in the company's core book business, as well as from growing operating losses in its e-reader segment.

In 2014, the negative business trends have continued unabated for Barnes & Noble, highlighted by a 9% top-line decline that was a function of sales decreases across its business units. While the company's profitability was much better than the performance in the prior-year period, the weakness could be attributed to cost cuts in its Nook e-reader segment, where it is moving to an outsourced business model. On the upside, though, the improved profitability has led to improved cash flow for Barnes & Noble, helping to push its balance sheet into a positive net cash position.

Where to go from here?
It's hard to clearly see an endgame for Barnes & Noble, although a reduced presence in the e-reader device market is almost assured, given the company's recent moves to outsource device production. The company never really had a chance in the device arena, once Apple and entered the fray with their iPad and Kindle tablet franchises, respectively, which are supported by their huge R&D programs and powerful ecosystems., in particular, has been a thorn in Barnes & Noble's side, due to its ability to cultivate an unmatched book marketplace, including providing an outlet for aspiring writers to showcase their wares through the Amazon Publishing operation. The company is also not afraid to use its cash hoard to enhance the value of its ecosystem, to the detriment of competitors. Its 2013 acquisition of Goodreads is a perfect example. Goodreads is a 25-million-member website that allows book lovers to congregate and provide recommendations to fellow members.

Keeping a horse in the race
Barnes & Noble is undoubtedly an intriguing story, with its national store footprint and the solid cash flow characteristics of its retail and college segments. However, with Barnes & Noble's customer volumes and profit stream seemingly declining year after year, you should probably be looking for an indirect way to play the company's upside, like through an intermediary such as Liberty Media.  Despite selling most of its shares in Barnes & Noble, Liberty Media did maintain a position in the iconic bookseller, hoping to profit from any future upgrade in the company's prospects.

More important, a position in Liberty Media provides exposure to the superior capital allocation skills of John Malone and his deputy Greg Maffei, who have shown an ability to create value for shareholders throughout business cycles. Case in point is their investment in Sirius XM Radio for a pittance during the throes of the financial crisis in 2009. This is a decision that has paid off handsomely for Liberty Media shareholders, thanks to Sirius XM's strong subscriber and operating profit growth over the past few years.

The bottom line
While Barnes & Noble seems to be a cheap stock, John Malone's pruning of Liberty Media's position in the bookseller should give you pause, since he probably knows more about the company than you or I do.  A better bet would be Liberty Media, which gives exposure to Barnes & Noble, while providing diversification from the other eggs in Liberty Media's basket.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Robert Hanley owns shares of Barnes & Noble,, and Liberty Media. The Motley Fool recommends and Apple. The Motley Fool owns shares of, Apple, Barnes & Noble, Liberty Media, and Sirius XM Radio. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information