Booth-Laird Q3 Letter Covers Apple, Bed Bath and Beyond Update And More by Booth-Laird
Bed Bath and Beyond Update
In our Q2 2014 newsletter, we discussed why we liked Bed Bath & Beyond Inc. (NASDAQ:BBBY), especially after the drop from its June earnings release to our lowest purchase price of $55.39. Mere days after we released our newsletter, BBBY announced the first debt issuance in at least 23 years with the proceeds to be used to accelerate the stock buyback program. In all, $1.5B in long-term debt (10, 20, and 30 year maturities) at low rates was issued. During the ensuing quarter, BBBY used the proceeds to buy back $1B of stock, representing ~8% of shares outstanding. Given how undervalued we felt the stock was and continues to be, we applaud management’s decision.
Further, BBBY reported a strong quarter ending August 30, 2014, realizing net sales growth of 4.3%, same store sales growth of 3.4%, and higher than expected EPS. Management also gave higher than expected guidance for the remainder of the year.
The stock buybacks coupled with the outperformance and higher than expected guidance led to a sharp increase in the stock price. As of close of business on Wednesday, October 8, 2014, the stock price has appreciated 20.7% since our lowest purchase price in June of 2014.
Bed Bath & Beyond Inc. (NASDAQ:BBBY) still has $1.8B remaining on its stock buyback authorization as of the end of the quarter ending August 30th. We continue to believe BBBY is undervalued and will not be selling anytime soon, barring a drastic change in the fundamentals.
Just over one year ago on September 19, 2013, Apple Inc. (NASDAQ:AAPL) had recently unveiled the iPhone 5C and 5S and was available for the split-adjusted price of $66.38 at market open. We sent the following e-mail, unedited from the original, to our investors: E-mail dated September 19, 2013: Apple recently unveiled the long anticipated new iPhone models as well as the new operating system for all of their mobile devices, dubbed iOS 7. The market’s reaction was both hypocritical and comical. It was also beneficial as we took the opportunity to add to the position with new funds we recently received. Kevin and I take great pleasure in watching the emotional rollercoaster that the overall market experiences when it comes to Apple. We observe this phenomenon with a cold and calculating eye, ready and waiting for the right opportunity to take advantage. To understand the market’s reaction to the latest product unveiling, you first have to understand the events and reactions in the months leading up to the unveiling.
Past is Prologue
Months ago rumors surfaced of a new smart phone Apple was developing that would be made of cheaper material and sold at lower price points. Eventually the name for this phone was released/leaked as the iPhone 5C. Most commentators derided the “C” as standing for “Cheap.” Analysts decried the lower margins that would be brought on by a cheap iPhone. Some even warned of the tarnishing of the brand should a cheap version be released. As might be expected, this wave of negativity caused the stock price to drop. After all, the market hates uncertainty, and a “cheap” iPhone is new. You may recall the reaction to the news of an iPad Mini. Many analysts mistakenly believed the Mini would either fail or plunge the company’s overall profit margins – they were wrong on both counts. But I digress.
Over time, analysts became increasingly comfortable with the thought of a cheap iPhone. After all, it opens up a whole new consumer base previously unaddressed by Apple. Lower margins would be offset by higher sales. How could Apple not have done this before now? A cheap iPhone makes perfect sense. As analysts changed their financial models and became more comfortable with a cheap iPhone, the stock began rising again. Famous investor Carl Icahn’s tweet that Apple’s stock was really cheap sealed the deal, sending the stock up over 5% in a day.
Full Newsletter here: Booth-Laird-Q3-2014-Newsletter