Why I Bought Shares in Bon-Ton Stores, Inc.

Is Bon Ton Cheap?

Published on:
July 31, 2017
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

Investors typically have different definitions of cheap stocks. One investor may look at the price quoted in the marketplace and argue that a stock that trades at a dollar per share is cheaper than a stock that trades at ten dollars per share. Another investor may define a cheap stock as one that has fallen below its 52-week price range. 

There are many more definitions. But in this post, I will attempt to define a cheap stock as a stock that trades: (1) at an earnings multiple that is lower compared to its earnings multiple over the past decade, (2) at a substantially lower earnings multiple compared to its peer companies, and (3) at a purchase price below its net tangible asset per share.

Bon-Ton Stores (BONT) meets that definition. The company shows an average free cash flow of $26 million, or $1.31 of free cash flow per share, over the past decade. And during that time, a dollar of free cash flow was valued by the marketplace anywhere between 75 cents and $13. 

As of July 2017, the common stock traded at a price of about $0.65 per share, which is the value of the 10-year average free cash flow per share at about 50 cents. Because the purchase earnings multiple is below the ten-year earnings multiple, our first criteria is met.

It is a low earnings multiple, especially when compared to peer companies. Over the past year, peer companies traded at a multiple of 4 times to 29 times their free cash flows, as the table below shows.

As a side note, I find earnings measurements, such as net income and EBITDA, to be spurious metrics, especially when a company has a large position in real estate. Instead, I use free cash flow as an earnings measurement because it includes capital expenditure expenses, which the other two measurements seem to ignore.

 In the Bon-Ton Stores analysis, I used a simple definition for free cash flow: operating cash flow less capital expenditure.

Now back to our third criteria, which is that a cheap stock is a stock that is trading below net tangible assets per share. In the case of Bon-Ton Stores, I estimated that for a purchase price of $0.65, you get about $5.47 of tangible assets. 

But before you go over the numbers in the table below, I would like to briefly go over the etymology of the word “tangible” - in its simplest form, it means “of what is capable of being touched.” And, in the context of business investing, the numbers reported on the balance sheet have to be adjusted to values that can actually be touched (read: taken back by the investor in liquidation). And here, they were materially different:

You will note that I arrived at a much higher tangible value per share of $5.47 compared to the reported deficit in equity of $3.93 per share. The main reason is that I value Bon-Ton's real estate properties and fixtures much higher than accountants. While my adjustments, which ignore accumulated depreciation, get us to a crude measure of value, they represent a probable price for what the real estate is worth. 

Again, as with most of my analyses, this is entirely subjective and each analyst should use his or her own judgment as to how to view the various balance sheet items.

Finally, while this is the concluding paragraph, I would like to suggest that you view it as a starting point. You may want to ask further questions to determine if this stock is of investment value, and not just a cheap stock. 

I would also suggest that you read what other analysts have written in Seeking Alpha. For example, Damitha Pathmala warns us that Bon-Ton is one of the ten most likely retailers to default this year. And a team of writers, using the pseudonym Elephant Analytics, commented on the company’s lackluster financials over the past few quarters.

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