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Is It Time to Make a King-Sized Bet on Bed Bath & Beyond?

By Nickey Friedman – Jan 28, 2014 at 12:10PM

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Bed Bath & Beyond looks cheap compared to J.C. Penney and Macy's.

OK, OK, I get it. The third-quarter performance and outlook for Bed Bath & Beyond (BBBY -0.71%) were a bit disappointing. However, does that mean the stock deserves to be shot down mid-flight? Following slightly disappointing but otherwise solid results, the stock price has been punished by nearly 20%. When compared to other housewares companies such as J.C. Penney (JCPN.Q) and Macy's (M -2.40%), Bed Bath & Beyond appears to be quite cheap.

Bed Bath & Beyond results
On Jan. 8, Bed Bath & Beyond reported its third-quarter results. Net sales jumped 6% to approximately $2.9 billion. Same-store sales bumped up 1.3%. Net earnings per diluted share leaped 8.7% to $1.12, though analysts had been expecting $1.15 per share. The company continued its stock-buyback program, with $171 million in repurchases during the quarter and $1.7 billion left under the current program. Over the last two years, the company used 86% of its cash flow for share buybacks.

Going forward, Bed Bath & Beyond lowered its fiscal fourth-quarter guidance a little bit. The company had previously been expecting earnings per share of between $1.70 and $1.77 and now expects it to be in the range of $1.60 to $1.67. This translates to full-year earnings per share of between $4.79 and $4.86 compared to between $4.88 and $5.01 before. It also sees 2% to 3% same-store sales increases versus the 3.5% to 5.5% it previously expected.

While nobody likes to see a 2% to 3% reduction in earnings estimates for the year, it's not quite the end of the world, as you'd think from the way the stock price reacted. It still represents around a 5% increase over last year, and analysts now expect earnings per share of $5.36 for next year. With a stock price of around $65 per share, this is a P/E of 12. This P/E seems cheap, especially considering the company has shown consistent growth and aggressive share buybacks, and others in this space trade with much larger P/E ratios.

J.C. Penney and Macy's
There is not a single analyst out of 21 of them that believes J.C. Penney will earn anything even close to a net income for the fiscal year ending 2015.  In fact, the most optimistic analyst of the group is looking for a net loss of $350 million.  In order for J.C. Penney to get a P/E of 12 in a similar valuation to Bed Bath & Beyond, the company would have to earn over $150 million or half a billion more than the most optimistic analyst.  J.C. Penney hasn't reported its official earnings for the holiday quarter yet, but I wouldn't hold my breath in terms of finding any evidence of earnings of that magnitude coming any time soon if ever.  

Meanwhile, Macy's hasn't reported it holiday quarter yet either, but the company did give preliminary notice that same-store sales jumped 3.6% during November and December.  Still, analysts only expect sales growth to be 1.2% for the fiscal year and 2.8% for next year.  This compared to 5.9% and 4.9% respectively for Bed Bath & Beyond.  Both Macys and Bed Bath & Beyond trade with forward P/E ratios of 12.  This suggests you get more potential sales growth for the same price of earnings with Macy's. 

Foolish final thoughts
In case I haven't made it clear, I believe the sell-off in Bed Bath & Beyond is way overdone and now represents a compelling value, especially when compared to others in the housewares industry. The company continues to aggressively buy back shares, and the cheaper price means even more shares will be bought back and retired, further raising long-term earnings on a per-share basis. Fools should take a closer look at the company... especially if the stock price slips any further. 

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Bed Bath & Beyond. 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.

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