Borders Group, Inc.
(NYSE: BGP) is one of the many retailers hit hard by the economic
downturn. Shares are trading more than 50 percent off of their 52-week
highs while investors express concerns over the company’s lackluster
profits and thinning margins. Increased competition from both its
brick-and-morter competitor, Barnes & Noble Inc. (NYSE: BKS), and online competition from Amazon.com, Inc. (NDAQ: AMZN), has cast doubt on the company’s ability to grow in any meaningful way. So, why buy this company?
Bill Ackman’s Pershing Square is one major investor that has taken a
major interest in the beaten down company. The activist hedge fund has
recently built up an 18 percent stake in the troubled bookstore with
options and derivatives that could allow him to boost it to 26.2
percent. Meanwhile, Pershing Square’s Richard Mcguire was elected to
the company’s board of directors on January 17th, which could give the
hedge fund substantial leverage when proposing any changes. However,
many remain unsure of what the famous activist sees in the bookseller
that is feeling the heat from its competitors.
Some believe that it could be a vote of confidence in the company’s
turnaround plan. Borders is prepared to open its new concept store this
Thursday in Waters Place shopping Plaza in Pittsfield, which has many
investors excited about the new possibilities. The concept store has
been hailed by the company as a new retailing model that will embrace
technology, boost sales, and differenciate the company from its larger
rival Barnes & Noble. Others suggest that the takeover rumors that
have surrounding the company for so long may finally come to fruition
with the stock trading at record lows.
The Borders Group itself is also trading at some cheap multiples.
The company’s price-to-book rate is very low relative to its peers,
suggesting that the company’s assets are undervalued. Meanwhile, its
price-to-sales ratio is also very low, suggesting that the company’s
revenues are strong if it can cut costs and debt to increase
profitability. In the end, these components do make for a good
turnaround play provided that the company can orchestrate a successful
turnaround. Many believe, however, that with an activist investor on
the board, the company should be able to do something right!
Overall, Borders Group is an interesting stock that is definitely
worth watching. Ackman’s portfolio returned 22% last year and his fund
has a great track record of success over the long-term. His vote of
confidence in the turnaround of this company along with his director on
the board make this a stock that is definitely worth watching over the
next months and years!
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