Investor Essentials Daily

Rating agencies are missing how the At-Home Revolution is supporting this company through the pandemic

January 27, 2021

The “At-Home Revolution” is still impacting countless industries, and we have been covering it since April 2020.

Today’s firm has been supported the last 10 months by consumer spending habits throughout the pandemic.

Despite these tailwinds, the rating agencies still appear concerned about this company’s stability.

Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.

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As we’ve talked about ad nauseum since April, the “At-Home Revolution” trend has transformed entire industries such as gamingsecurity, and home improvement.

Here at Valens, we have not changed our position that consumers are going to continue spending more time and money at home in the foreseeable future.

This shift in consumer spending is not only driven by working and learning from home. People have been looking to move out of cities and into bigger homes in the suburbs since last March. With the advantages of city living curtailed thanks to the pandemic, home sales in more rural areas have skyrocketed.

After buying a new home, it’s important to get it properly furnished. Outside of large furniture, people often forget how many small accents and tools you need around the house.

Whether people are looking to spend more money to upgrade their homes or to make a new purchase perfect, there are a lot of small details required to perfect the home.

Bed Bath & Beyond Inc. (BBBY) is at the heart of this new wave of home improvement spending. The firm is also well-positioned for budget-minded consumers after they have already spent a large sum on the house itself.

Bed Bath & Beyond has been supported by the At-Home Revolution. People have flocked to these stores to upgrade their appliances, stock up on kitchen towels to go along with more home cooking, and make sure that their homes are fully furnished.

That said, S&P rates the firm as lowly as a B+ high yield name. This rating implies a near 25% chance Bed Bath & Beyond goes bankrupt within the next five years.

Any company with demand and favorable consumer trends this strong is unlikely to go bankrupt. To break down the real bankruptcy risk, our Credit Cash Flow Prime (CCFP) analysis is able to compare a company’s true cash flow to its obligations.

In the below chart, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).

As you can see, Bed Bath & Beyond has sufficient cash liquidity through 2025 to cover all of its obligations. On top of this, the company has flexibility with its maintenance capex, along with cash flows covering all other obligations.

Rather than a name in distress, BBBY has relatively low credit risk. This is why S&P’s B+ high yield rating, with a 25%+ risk of default expectation, is not rooted in reality.

Using the CCFP analysis, Valens rates Bed Bath & Beyond as an XO rating. This is equivalent to S&P’s BBB- rating which corresponds to a default risk of less than 2%, well below the 25% implied by a B+ rating.

Ultimately, Uniform Accounting and the Credit Cash Flow Prime analysis highlights how BBBY’s credit risk profile is much safer than what rating agencies believe. By using Uniform Accounting, investors have the context to understand how strong industry tailwinds correspond to a safer credit profile.

SUMMARY and Bed Bath & Beyond’ Company Tearsheet

As the Uniform Accounting tearsheet for Bed Bath & Beyond Inc. (BBBY:USA) highlights, the Uniform P/E trades at a 34.5x, which is above the corporate average valuation of 25.2x, but below its own historical valuation of 42.7x.

High P/Es require high EPS growth to sustain them. In the case of Bed Bath & Beyond, the company has recently shown a 38% Uniform EPS decline.

Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.

We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Bed Bath & Beyond Wall Street analyst-driven forecasts are 97% EPS shrinkage in 2021 and 2,524% EPS growth in 2022.

Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Bed Bath & Beyond’s $30.21 stock price. These are often referred to as market embedded expectations.

The company would need to grow its Uniform earnings by 6% each year over the next three years to justify current stock prices. What Wall Street analysts expect for Bed Bath & Beyond’s earnings growth is well below what the current stock market valuation requires in 2021, but well above that requirement in 2022.

Furthermore, the company’s earning power is below the corporate average. That said, cash flows and cash on hand are more than 2x its total obligations—including debt maturities, capex maintenance, and dividends. Together, this signals moderate credit risk.

To conclude, Bed Bath & Beyond’s Uniform earnings growth is below its peer averages, while their valuations are trading well above peer average levels.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research