Specialty retail company Bed Bath & Beyond is yet again taking Wall Street by surprise today, surging to $23.08 and marking a 11.8% change compared to the S&P 500 (-0.7% ). BBBY is 561.32% above its average analyst target price of $3.49, further cementing its status as a meme stock whose price may seemingly defy standard valuations and analyst predictions. Nonetheless, we believe it could be helpful for retail investors to spend more time looking at the fundamentals, and less time following r/wallstreetbets and Ryan Cohen's twitter account.
Bed Bath & Beyond is categorized within the consumer cyclical sector, which encompasses the luxury goods, clothing, travel, and entertainment industries. The cyclical aspect of these companies refers to the tendency of their sales -- and as a result, their stock price -- to correlate with periods of economic expansion and contraction.
The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio for US consumer cyclical companies is 24.27, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, overhead, and taxes).
Bed Bath & Beyond does not publish either its forward or trailing P/E ratios because their values are negative -- meaning that each share of stock represents a net earnings loss. But we can calculate these P/E ratios anyways using the stocks forward and trailing (Eps) values of $-3.41 and $-5.64. We can see that BBBY has a forward P/E ratio of -6.8 and a trailing P/E ratio of -4.1.
Besides the earnings from their core business, companies have many other costs and sources of income. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability. We can see the effect of these additional factors in Bed Bath & Beyond 's levered free cash flow of $-222,204,256.
If it weren't negative, the unlevered free cash flow would represent the amount of money available for reinvestment in the business, or for payments to equity investors in the form of a dividend. While a negative cash flow for one or two quarters is not a sign of financial troubles for BBBY, a long term trend of negative or highly erratic cash flow levels generally means trouble ahead.
As of the second quarter of 2022, Bed Bath & Beyond is likely an overvalued stock since it has a negative P/E ratio, no published P/B ratio, negative cash flows, and an analyst consensus for little upside potential. We hope this preliminary analysis will encourage you to do your own research into BBBY's fundamental values -- especially their trends over time before making an investment decision. Staying abreast of the market is a full time job -- and most investors simply don't have the time to keep track of it all. At Market Inference, we help you sift through the noise to gain knowledge and perspective as an investor. subscribe to our free newsletter today!
