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    MARKET EDGES

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In the midst of the current correction, Keith continues to look towards quality names with stability in earnings momentum, proactively-driven top line growth, and plenty of cash to boot. In other words, Bed Bath & Beyond.

Here’s a reminder as to why we like this one…

  1. Long-term: Combine a remarkably consistent management team, steady unit growth, outsized market share gains regardless of the economic climate, and you get one of the most predictably efficient growth models in retail. We don’t buy the ‘growth is maxing out’ argument – the fact is that there’s still 85% of this industry that BBBY does not own. Sprinkle on underappreciated/undervalued non-core concepts and call option on putting $1.7bn cash hoard to work, and this is a tough story not to like at face value.
  2. Intermediate-term: Earnings guidance calls for 10-15% growth in 2010. We’re looking for 25% and that may be conservative.  Yes, expectations have risen, but 4Q was just the third quarter in a row (after 10) in which gross margins improved.  Sales are accelerating, as they should when a macro recovery is underway and the company’s biggest direct competitor is now gone for just over a year.
  3. Near-term considerations: The catalyst here should continue to be earnings. BBBY is not scheduled to report until the back half of June, but our degree of confidence in the model is high. Management finally putting the cash hoard to work would be a welcomed bonus.

Valuation: At 8x EBITDA and 15x P/E, we ‘get it’ that it is not exactly the cheapest name in retail. But its been a long time since I’ve seen a name in retail where more people say “it’s too expensive…I missed it.”  That’s a tough argument to stick to when you have a quality name that’s got growth, earnings momentum, market cap, and cash.