BBBY is certainly not going to grow at +15% as its ROE implies.BBBY uses a lot of of its FCF to buy back stock which trades at 3-4x P/B.However, on the resulting BVPS it earns +15%. Just for clarification an example, stock is trading at $3, BVPS is $1, ROE is 15% therefore it's EPS is $0.15. If it uses all of it's earned cash to buyback shares (resulting in 0.95 shares), the resulting BVPS is $1.053 If it earns 15% on equity than that years EPS will be $0.157.So effectively it is growing at 5.3% despite 15% ROE because of the buybacks at a premium P/B. Agreed.
Earning growth will only enhance this return. If they reinvest all their money into buybacks, where will the earnings growth come from? Or are you taking FCF for buybacks, so the capex is taken care of already? But then you should not be using ROE, you since ROE is earnings-based, not FCF-based. For BBBY depending on period FCF may be 2/3 of earnings. They do spend all of it - and sometimes more than all of it - on buybacks.
In any case, I somewhat agree, but you'd have to be more precise with this part. :)
On this basis I think BBBY looks quite good as all that is needed is single digit growth in EPS. I am not sure I follow. Walk me through why it looks good:
- What FCF-return on book you assume? Do you assume it all going to buybacks?
- What growth you assume?
- What's your valuation model based on the above?
Furthermore, this year BBBY spent a lot of money on acquisitions (600M+). This kind-of writes off the argument for FCF being used for buyback since there was no FCF left. Of course, they did spend FCF on buybacks and the acquisitions came from somewhere else. I would not be comfortable saying that acquisitions did not consume their cash though. And I am not sure if that 600M+ investment will return 15% or even 10%.
Thanks |
