Why? Trends

There are two new trends and Borders is not at the head of either of them….

I own a Blackberry and have started listening to books on it while I do research and blog late at night. The #1 app for the Blackberry to do this is from Audible.com. Who owns Audible? Amazon (AMZN). Being a Borders shareholder and a team player I of course looked there first but was unable to find the ability to buy a title on Borders.com and then listen to it on my Blackberry.

Now, it may be possible to do it, but it was not readily apparent so either it does not exists or is hidden. Following my “I’m not that different that most folks” mantra I have to think scores of other Blackberry users are doing the same thing and Borders is not capturing that crowd

Reason #2

eBooks. Amazon (AMZN) and its Kindle are clearly #1 is this very rapidly growing category. But, with the growth there, a strong #2 can do very well especially if they have the option to combine it with an actual bookstore to capture all audiences.

Borders has the Sony reader and an eBook section on its website. They were, by default #2 but failed to capitalize on that standing and now have this:

From Engadget

Barnes & Noble (BKS) and AT&T (T) already went ahead and offered free WiFi to iPhone users (and everyone else, albeit inadvertently) last year, and it’s now finally gone and given up on those pesky subscription fees altogether. As the pair of companies jointly announced today, that new and welcome change is now already in place at all Barnes & Noble stores in the US that offer WiFi, and the bookstore is not-at-all-coincidentally taking advantage of the opportunity to promote its recently launched eBookstore, to say nothing of its forthcoming e-book reader. Last we heard, they still have actual books and stuff there, too.

In the release Barnes & Noble said:

Customers Can Download Barnes & Noble Free Apps and Get Access to the World’s Largest eBookstore — Exclusive Content, Customer Reviews, Information about In-Store Events, Locate a Store, and Much More..

In short Borders sat back while BKS passed them in the category. Again there is no apparent eBook store on the Borders site so it would appear this medium is not a huge category.

What recently was the #1 iPhone free app? The Barnes and Noble app. Barnes and Noble has figured out the way it would seem to tie the eBook/online/smart phone/book store crowd together.

Borders? Nothing. Now again Borders may have these items out there, but if they do, they have done an abysmal job promoting them and it is costing them.

What to do then? Borders is well on its way to fixing it financial house and that ought to propel shares back above an area I need to eek out a small profit on what I have left for my efforts there. After that, I’m not so sure.

Remember last summer when it was rumored BKS was looking at buying BGP? Maybe this was the reason for passing, they had plans to beat them rather than join them…

This goes to why you just can’t buy cheap and ignore. You have to follow the business environment surrounding what you own. If it changes negatively and in my opinion Borders has, then you must re-evaluate your thesis. While I will most likely not lose any money (most likely make 5%-10%) on Borders, the big opportunity in it is fading and I feel I have far better options elsewhere.

Disclosure (“none” means no position):Long BGP, none

See more great investing video at Wall St. Media

Disclosure (“none” means no position):Long all securities listed above…

See more great investing video at Wall St. Media

Disclosure (“none” means no position):Long all securities listed above…

From Media Bistro

After just one week in the Apple App Store, the brand-new Barnes & Noble iPhone app has grabbed the number one slot on the “Top Free Apps” list in App Store’s “Books” category–unseating two Amazon digital reader applications from the top spots.

With the new Barnes & Noble app, readers can shop, read reviews, and explore web-only extras via smartphone. While these rankings are constantly shifting, the new app has overtaken both the Amazon Kindle (AMZN) for iPhone (AAPL) and Amazon-owned Stanza e-reader in popularity–perhaps a good omen for Barnes & Noble’s future in the smartphone market.

Here’s the most geeky and interesting feature on the bookselling app, from the release: “Barnes & Noble has partnered with LinkMe Mobile from Evryx Technologies, Inc. and Spotlight Mobile, Inc. so that users can simply snap a photo to search millions of products. Using the iPhone or iPod touch camera, just snap a photo of the front cover and within seconds get product details, editorial reviews, and customer ratings–even find and reserve a copy in the store closest to you.”

To me this is a tell that there will always be something “tactile” as my friend @wood83 says when it comes to both books and the sales process for them. The Barnes & Noble reader has the advantage of tying the online/store shopping experience together (shame on Borders for not having this done yet). Now this is not a negative for either Apple or Amazon but a huge plus for Barnes. Successfully tying in the web with the store at all levels give them a unique model that is effectively unmatched.

We seem to be in a series of “death of” loops now. Everyday I turn on something electronic I am hearing about the “death of buy and hold”, the “death of value investing”, the “death of (place item here)”. Ignore them all.

Is the book business changing, perhaps forever? Yup. Is the experience of going to a bookstore going away? No.

Disclosure (“none” means no position):Long BGP, none

- We live in a world without traditional borders. The US tax rate MUST compete internationally or we will lose jobs. There is no debate on that. NY & California have seen that with their wealthy resident as they decided to move rather than pay exorbitant taxes. Nations will suffer the same fate

- Interesting polls on what people tend to read re: their views.

- Now, I’m not a fan of the guy but this is is bit much. But, it does go to the hyper-sensitive nature of Israel right now feeling isolated. That is very, very dangerous

- What is dissapointing is that the MSM is letting this go. There IS NO way to measure what the administration claims. Why do they continue to let them claim it?

Disclosure (“none” means no position):

Price jump aside, what is even more promising is that their reasoning backs what we have been talking about here for the better part of 6-8 months now. Borders is heading in the right direction in a simply brutal environment….

In a group that has moved, BGP stands out as an underappreciated turnaround situation with significant potential upside off a low base. We are raising our 12-month price target sharply, to $4.50 from $2.00, reflecting BGP’s solid 1Q performance relative to expectations, strong short-term cash flow dynamics, and the more generous multiples being rewarded to levered turnaround stories in the early stages of economic recovery. The firm’s new management team is driving financial discipline, with significant cost controls, and implementing merchandising improvements, i.e. driving the children’s business, gradually exiting music and video, and reducing cycle times with vendors. BGP faces structural and financial risks, but there is a price for every security, and its riskadjusted upside has become increasingly appealing as the firm emerges from financial distress, and EBITDA looks poised to stabilize off 2008 troughs.

Implications
We are raising our 2010/2011 EPS estimates to ($0.16)/($0.08) from ($0.60)/($0.40), respectively, reflecting the 1Q beat, as the company delivered a loss of ($0.31) per share, vs. our ($0.49) and last year’s ($0.53), reflecting both gross margin and expense upside. We are flowing additional margin improvement through to the year, and expense control to 2Q & 3Q, noting that the firm does cycle substantial expense cuts at 4Q. We are also introducing a 2011 estimate of ($0.07).

Valuation
Our new $4.50 target, up from $2.00, is derived using risk/reward EV/EBITDA analysis. Note that the stock appears quite inexpensive on FCF yield, but that cash flows are not sustainable at these levels given the depressed state of cap-ex relative to D&A.

So what happens to Borders? My friend on twitter @Dasan thinks the paper book biz is headed the way of the CD via amazon (AMZN). I disgaree. While an increasing number of folks will get digital books, children’s books will never be digitized and books, unlike a CD are a hands-on experience for most folks.

That being said, Borders and Barnes & Noble (BKS) need to merge. While they cannot compete separately with Amazon’s Kindle, Border’s deal with Sony’s Reader can enable them to compete combined. Further, rather than competing with each other on price, the combined entity would see margin improvement in the physical stores & give them more bargaining strength with suppliers. Anit-trust issues are minor as Wal-Mart is a huge book retailer and the combined entity would still be dwarfed by Amazon. There is store overlap but working off that excess is less of a concern that the benefit they would see from a merger.

Let’s not forget that it was just last year that BKS looked at BGP but declined to make an offer. Let’s also not forget this was last year at a time when credit markets were collapsing and BGP’s turnaround was in doubt by many. Now that both of those issues are far less urgent, do not be surprised to see BKS take another look at its brick and mortar rival.

Pershing Square ans Bill Ackman have become a 40% shareholder.

Patience is required on this one. This is a hold because selling now, to try and buy back in later could cost you. I can easily see a scenario in which we wake up one day and either BKS or another private equity firm make an offer for the company.

Disclosure (“none” means no position):Long BGP

Work still needs to be done on Borders.com. The site is sluggish and ordering can be difficult. Customer service is responsive BUT, Borders needs to eliminate the necessity to even need them which seems to be all too frequent. On the positive side, the site is very visually appealing and the Rewards Program and the affiliate relationships do offer tremendous savings. But, to bring it to the next level as a destination purchasing site…..it needs to be faster….much faster and the ordering glitches need to be eliminated.

Borders Group Q1

Disclosure (“none” means no position):Long BGP