One More Look at Borders
Friday, May 15, 1998
By Greg Markus (TMF Boring)
ANN ARBOR, Mich. (May 15, 1998) -- A Boring Portfolio will tend to lag behind a rampaging bull market, and this one certainly has. On the other hand, when the bull pauses for a rest or -- difficult as it may be to conceive these days -- even backtracks a bit, a Boring Portfolio should be expected to continue to chug along, slow but steady.
On this options-expiration Friday, the Borefolio did just that, rising modestly for the second consecutive session in the face of a southbound market. All in all, the Borefolio advanced 0.13% while the Dow shed 76 points, the S&P 500 fell 0.77%, and the Nasdaq tumbled 1.00%.
Shares of Borders Group (NYSE: BGP), the largest holding in the Borefolio, led the way, rising $1/2 to $33 1/16 in heavy trading. On Wednesday, Borders reported results for its fiscal first quarter and held a follow-up conference call, a summary of which we've provided for you. Also this week, the company formally announced the launch of its e-commerce site, Borders.com.
As noted in last Friday's Boring recap, I ordered three books from Borders.com a week ago, barely hours after the site had opened, as a sort of test drive of the operation. The total price for my transaction was a coupla dollars better than it would have been on Amazon.com (Nasdaq: AMZN), but I doubt that this is indicative of any systematic pattern. Some items are a bit cheaper on one site, some a bit cheaper on another; most are priced comparably across the websites of all the major players, including that of Barnes & Noble (NYSE: BKS).
As for order execution, I received an email from Borders over the weekend stating that one book I'd ordered that had been advertised as being "immediately available" would take 48 hours to obtain. To make up for the inconvenience, Borders.com said they would upgrade my order from regular delivery to priority mail. (The other sites typically do that, as well.)
Sure enough, my three books arrived on Wednesday, in good shape. Enclosed in the package was a brief survey asking me to rate various aspects of the service and inviting my suggestions for improvements for the website. My wish list includes a more flexible and powerful search engine and more reviews and related information about the books.
The e-commerce initiative is not the only focus of attention at Borders. At least as significant are plans for international expansion of the bricks-and-mortar stores. Three new Borders superstores will be sprouting up in the U.K. this year, as well as one down-under in Melbourne, Australia. I'm negotiating with Fool HQ now to conduct extensive field research at one or more of those locations.
Okay, so that's the story on Borders Group, the company. How 'bout Borders Group, the stock?
Well, from a comparative perspective, the closest comparison group is Barnes & Noble and Fool Portfolio holding Amazon.com. I've offered my opinions on Amazon's valuation before; to use the phrase of the day, I don't want to go there.
As for B&N, it and Borders are very similar in many ways: both are aggressively rolling out big-box stores, both have mall-based operations grafted on (Waldenbooks for Borders, B. Dalton for B&N), and now with the tardy arrival of Borders.com, both have fairly high-profile sites for selling over the Internet.
In terms of the numbers, both B&N and Borders are capitalized at around $2.5 billion. Both are projected to grow per-share earnings in the mid-20% range over at least the next few years.
And until fairly recently, the stocks of the two companies tracked each other almost perfectly -- that despite the fact that Borders looks a bit better in terms of return on equity, net margin, and some other financial measures.
Then B&N launched its e-commerce operation, and the multiple for its stock became instantly Webified, leaving Borders behind (although B&N has since come back a bit). Borders stock currently trades at about a 10% discount to that of B&N.
Borders is trading at 27.1 times projected earnings of $1.22 per share for the current fiscal year and 21.9 times the analysts' consensus EPS forecast for fiscal year 1999 (ending January 2000). Barnes & Noble, by comparison, trades at 30.4 times this fiscal year's estimated EPS of $1.13 and 23.9 times fiscal 1999 projected profits of $1.44 per share.
In my opinion, that gap must close now that Borders.com has shown its face. And, in my opinion, the gap will close by moving Borders' stock up to B&N's multiple (which is not unreasonable for 25%-plus annual growers these days) rather than vice versa.
As for Amazon.com's valuation, as I said: I don't want to go there.
Stock Change Bid ANDW - 7/16 21.88 CGO - 3/4 35.25 BGP + 1/2 33.06 CSL --- 51.50 CSCO + 3/8 76.38 FCH + 3/16 35.38 PNR - 1/16 44.88
Day Month Year History BORING +0.13% 1.14% 4.35% 31.31% S&P: -0.77% -0.27% 14.25% 78.36% NASDAQ: -1.00% -1.16% 17.60% 77.41% Rec'd # Security In At Now Change 2/28/96 400 Borders Gr 11.26 33.06 193.73% 6/26/96 150 Cisco Syst 35.93 76.38 112.55% 8/13/96 200 Carlisle C 26.32 51.50 95.63% 3/5/97 150 Atlas Air 23.06 35.25 52.87% 4/14/98 100 Pentair 43.74 44.88 2.59% 11/6/97 200 FelCor Sui 37.59 35.38 -5.89% 1/21/98 200 Andrew Cor 26.09 21.88 -16.16% Rec'd # Security In At Value Change 2/28/96 400 Borders Gr 4502.49 13225.00 $8722.51 6/26/96 150 Cisco Syst 5389.99 11456.25 $6066.26 8/13/96 200 Carlisle C 5264.99 10300.00 $5035.01 3/5/97 150 Atlas Air 3458.74 5287.50 $1828.76 4/14/98 100 Pentair 4374.25 4487.50 $113.25 11/6/97 200 FelCor Sui 7518.00 7075.00 -$443.00 1/21/98 200 Andrew Cor 5218.00 4375.00 -$843.00 CASH $9447.76 TOTAL $65654.01