Description

BNED has been written up several times and we’d refer you to magundun’s recent writeup and updates. The purpose of this quick and dirty writeup is to illustrate the technical advantage that you will have by buying today and holding through earnings. We like the stock anyway and think it’s a good LT value play and actually serves as a recession hedge as enrollments tend to increase during recessionary periods. We provided a slight summary on the fundamentals, but given the trajectory of the underlying business and technical headwinds recently we find the opportunity assymetric. Apologies if some of this is a rehash but believed it would be instructive to at least touch on the fundamentals as a decent backdrop onto the larger technical advantage one would now have at this time.

Russell Deletion

We believe the selling that was associated with the index deletion is behind us and this name should rerate as it returns more to a fundamental story. Higher volume selling should be behind us.

This has always been a 2023 story…

In an effort to bring you up to speed on what has transpired in the last couple years:

12/20 - Fanatics invested $15 mm at $6.5/share and has partnered with them on merchandising their retail stores

6/21 – BNED hosted investor day and provides ’23 guidance; stating they will be near ’19 EBITDA. The Adj EBITDA for ’19 was $104.9

3/22 – BNED states that ’23 EBITDA will now be less than ’19 EBITDA blaming Covid and specifically Omicron for forcing them to foot fault

6/29/22 - BNED reports earnings on 6/29

Analysts aren’t exactly putting their neck on the line, but they are at least somewhat hopeful with price targets of $6 and $8 with the below ’23 EBITDA estimates:

’23 EBITDA

There will be fireworks on 6/29. With a $610 mm EV including a $150 mm market cap, we believe that the company could guide between $50-$60 mm.

There truly is a range of what ’23 EBITDA could be. That is the rub. Given they are a bit snakebit from the last time they gave guidance and they will temper it with some sort of covid discount, we actually believe the earnings power of this business is north of $100 mm /year and we should easily see that in ’24 and ‘25. Again, the market cap as it stands today is $168 mm and this company has proven over the years they will not raise equity at the wrong price. Yes, this is a duration asset but this isn’t Shopify and shouldn’t be down 55% ytd. And yes, we provide below how large of a range EBITDA truly could be. But if they don't hit the high end of EBITDA this in '23 (other than some black swan event) they likely at least hit it in '24.

Segments

The Company has 3 segments: Retail/FDC, DSS and Wholesale. Retail/FDC is the textbook business that is going through a transformational change (see below), DSS (Studentbrands / bartleby: blackboard competitor) is an edtech saas business growing nicely at over 30% yoy with enormous operating leverage, and Wholesale is really just a call option on students returning to campus. Just a remidner that remote college is not fun.

Its also important to understand that any liquidity constraints that may arise for BNED should largely be a function of WC growth from here on out. They do not provide availability on the revolver and we can likely assume the recent debt agreement was to fund growth as they are on the cusp of returning to cash flow generation.  

As the focus of this writeup is more technical rather than fundamental in nature but it doesn't hurt to know what you are buying. FDC is the gem. FDC has already proven that it will continue to transform the way textbooks go to market. It will ideally cannibalize the existing Course Material Segment but in doing so will build a moat around that revenue stream that will be bulletproof. Again, there is no churn to this business. The SCHOOLS are charged a fee per hour of coursework. The professor decides if they want the textbooks to be physical, used or virtual (different margins based on choice) and the school charges the student and pays BNED directly. This is in contrast to the legacy model where students were tasked with all of that decision making and tried to game their options for best pricing. This new improved segment should trade at software multiples. The infrastructure will only continue to be more ingrained within the ecosystem. FDC now functions as a sticky middleman with high switching costs. This was a $33 mm business in ’19 and could be north of $400 mm in 2023. Magundun has done yeoman’s work in outlining the projected number of students that FDC could control over the next couple of semesters. Let me be clear here: this is not a 10X EBITDA business. FDC and DSS should fetch some multiple of sales as it continues to post impressive growth…attrition is pretty much nonexistent and they have shown proof of concept and are having tremendous success in rolling out FDC.

DSS: We can't really see several years of floor 30%+ growth in DSS especially as they package it in as a full solution to the schools by pairing it with FDC. 

From Q3 ER:
Q3 - 76 campus stores utilized BNC’s First Day® Complete courseware delivery program during the 2022 Spring Term, at institutions representing over 380,000* in total undergraduate enrollment; up from 14 campus stores and approximately 62,000* in total undergraduate enrollment in the 2021 Spring Term.

Yes, number of hours and enrollment has been depressed in the short term…that’s just noise. Let me repeat this: Remote College is not fun. Have you ever zoomed into a frat party? Merchandise sales will return once stadiums are packed again.

Edtech has been hot…well when things were hot, it was hot. These are different times, but with any PE interest in the same zip code as what Pearson rejected Apollo, we are looking at a 4-5 bagger from here.

Risks:

The risk to this name is that we get hit with another covid outbreak which derails college enrollment. We show 2.7 mm shares short (~5% of the float) which could be yet another catalyst. Approximately 20% of the float is closely held though it looks like Huseby (CEO and Chairman) let some shares go a few days ago. Since they are in a quiet period, Id assume this was a scheduled sale as he did something similar in April 2021. That being said board member, Levenick, had been acquiring shares until he just got tired of catching the knife in March 2022. You are still buying this well below his average cost. The only other risk we can really identify is that (if this qualifies), mgmt looks to be making long term decisions. This sometimes reflects as ST pain as the company does not have extremely high ownership nor are they overly promotional. We generally like less flash but also tend to side with companies where there is much higher inside ownership.

Again, this name is not without risk, but we believe that the setup provided by the R2k deletion has given you a pretty entry price into what should be a long term compounder.

Given how sensitive this name will be to Q4 earnings, it may be prudent to at least wait until after earnings, but either way the point is that whether its '23 or '24, this business has $100 mm ebitda capacity and you are buying it at $168 mm. As long as there is no fundraise in the next 12 months (which we do not forsee based on the balance sheet), we like the risk / reward at these levels. 

Catalyst

(see above)