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Build-A-Bear: Micro-Cap Value Heaven

Posted on: August 28, 2008 - Email Article - Printable Version

Charles W. Petredis

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Many investors shy away from investing in micro capitalization stocks, generally for good reasons. On average, micro-cap stocks are more dangerous and volatile than their larger peers. Many of these businesses are in the fragile stage of their lives where failure or bankruptcy is still a possibility. While this is true, micro-cap stocks have historically provided some of the highest returns for investors, and if you are able to stomach the extreme volatility they could be an investment strategy that can work for you.

When it comes to investing in micro-cap companies, a thorough analysis of financial statements is key to finding a successful investment. Generally speaking, there are a few key things that you should be looking for when analyzing financial statements; however, as with almost every single question involving investing, it always depends. While certain lines of a balance sheet or income statement may be more important than others, there can be hidden value traps among these SEC (Security and Exchange Commission) cleared documents. The best piece of advice I can give you is that if you don’t feel comfortable with any portion of a company, don’t invest. Warren Buffet used to say that if you cannot determine if a company is worth buying, than it is too complicated for you to invest your capital in that company. This is not supposed to be embarrassing, it helps to make sure you are getting your homework done. Proper research is very important so you don’t encounter any surprises later on down the road. Wouldn’t it be great if all investors took this careful approach to investing? But that is another story for another day, let us get down to the fundamentals.

Company Description and Business Model

Build-A-Bear Workshop Inc. [BBW: 4.91, +0.25 (+5.36%)] is a retailer of do-it-yourself plush animal toys. In case you are unfamiliar with the company, they have stores which are actually factories. You can go to the store and build any sort of animal you can think of, with more accessories than you could possibly imagine. The experience of building your own lovable animal is at least half of what they are selling to their customers. The company operates over 350 stores worldwide in over a dozen different countries.

Step back for a minute and try to get a grasp of the sheer genius that went into designing this business model. The stores only have a few employees because you are assembling your own animal, they are just there to help with technical difficulties. The distribution centers do not need any workers because they are just shipping boxes of materials to each location, not assembling anything at these locations. Their overhead is extremely low, and their materials are fairly cheap. Obviously they are affected marginally by the increase in transportation costs, but that shouldn’t be a huge concern with the scale and design of their business.

Valuation Metrics

Build-A-Bear is trading at a pretty deep discount compared to most stocks in it’s sub-sector, especially considering the fact that Build-A-Bear has zero debt. Often companies with zero debt will trade at a premium to their competitors because they have a lower level of risk all other things being equal. On top of being debt free, here is a list of some other very impressive numbers.

Trailing P/E - 10.70x
2008E P/E - 13.14x
2009E P/E - 11.89x
Price/Book - 0.80x
Enterprise Value/EBITDA - 2.69x
Trailing PEG - 0.97x
Total Cash and Cash Equivalents - $15.63M
Book Value Per Share - $9.41

All of these stats are impressive but I’d like to focus on the $15M+ in cash. With a market capitalization of $146.23M you have a stock that is trading at $7.49 and has $0.8 of cash per share. With a stock price that is currently comprised of 10.7% of cash it seems pretty obvious that the risk level going forward is fairly low.

The most impressive statistic is the book value per share. At $9.41other things being equal if the company was sold today for fair value there would be a 25.63% premium on today’s closing price. To me this is a a situation with some risk but much higher reward.

Risks and Conclusion

Yes, Build-A-Bear missed earnings last quarter missing by $0.12 and they have missed earnings three out of the last four quarters but I believe that with even average management this is the type of company where it would not take a ton of luck to succeed. The business model is solid and with the new GDP numbers coming out much better than expected today it could be time for a turn around. The stock is down from $40 to the current price of $7.49 and gone as low as $5.61. I believe that any price in the lower part of the $6.XX range would be a good entry price.

I was in a store last month to speak to a few of the employees and every single one at the store spoke glowingly of CEO Maxine Clark, three of which had met her personally on numerous occasions. It seemed that whenever I turned around half of the kids in the mall were lugging around one of the signature Build-A-Bear boxes, and this was when gasoline was closer to $4.00 a gallon. I think Build-A-Bear is a nice risk reward play for any investor trying to bet on an economic turnaround that is sooner than expected.

- Charles Petredis

Disclaimer: Author holds no positions in the companies mentioned above.

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