If you apply a 40% margin to the company’s $5.6 billion in tangible invested assets, you get a normalized pre-tax earnings figure of $2.24 billion. Last year, the company earned $1.57 billion before tax — so assuming $2.24 billion in normal pre-tax earnings assumes a reasonable amount of growth for the company.
The market currently values Bed Bath & Beyond at about $13.6 billion — or 6x my estimate of normal pre-tax earnings. Using a 35% tax rate, this is a little over 9x normal earnings.
It seems incredible that a company with Bed Bath & Beyond’s competitive superiority would sell at just 9x normal earnings, but remember that figure takes growth into account. However, the company trades at just 8.7x last year’s pre-tax earnings, so shareholders will likely receive an adequate return even if the growth does not materialize.
The article This Retailer Is Still Attractive Despite Run-Up originally appeared on Fool.com and is written by Ted Cooper.
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