Why Bed Bath & Beyond Has Big Upside Potential

Bed Bath & Beyond (NasdaqGS:BBBY) is expected to report earnings on Wednesday after the market closes. Shares are trading near their three year low and for good reason. The retailer has reported disappointing earnings ten out of the last twelve quarters.

In the face of a coupon focused consumer, the company has struggled to price its merchandise at a premium (something its been able to do historically). As a result, Bed Bath & Beyond's EBITDA margins have steadily fallen over the last eleven quarters and the stock has followed suit.

However, positive trends have been manifesting in the residential real estate market which may potentially increase demand going forward.

Bed Bath & Beyond's stock also looks attractive purely on a fundamental basis. Finbox.io's intrinsic value estimate of $48.76 implies that the stock is nearly 25% undervalued. The estimate is calculated by applying Wall Street projections to seven separate valuation analyses.

<img src='http://res.cloudinary.com/finbox/image/upload/v1490907750/BBBY_Fair_Value_Estimate_ullq5d.jpg' alt= ‘Bed Bath & Beyond (BBBY) fair value estimate’>
^{View all seven valuation models that derive BBBY's fair value estimate.}

A Rising Residential Housing Market

Multiple reports released this week indicate that the US residential housing market is stronger than it has been in years. Last Tuesday (3/28), the S&P/Case-Schiller home price index showed that prices rose 5.9% in the 12 months through January, the fastest annual rate since mid-2014.

Then on Wednesday (3/29), the National Association of Realtors reported that US “pending” home sales hit its second highest level since 2006. These new developments indicate a rising US residential housing market.

Demographics will also play a pivotal role going forward as Millennials have recently overtaken Baby Boomers as America's largest generation. Millennials have often been referred to as "Generation Rent" but this will likely change as the oldest Millennials are just now reaching their mid 30s. Meaning that their attitudes will likely change toward a more settled life and therefore, may prefer to buy a home.

Although an improving housing market may not directly or immediately impact Bed Bath & Beyond, it is a positive sign that could potentially increase demand for its merchandise over the next few years. Many of these new home owners will inevitably look to retailers like Bed Bath & Beyond for furnishings.

BBBY Has More Upside Than Downside

Bed Bath & Beyond's shares have been hammered over the last few years due to its inability to materially grow its top line while margins continue to fall.

However, these headwinds appear to be fully priced in. This Earnings Power Value analysis shows that if the company can simply sustain its current earnings into perpetuity, the stock is 12% undervalued (using a 10% cost of capital).

Furthermore, Morningstar just released this article that gave BBBY a 5-star rating and assigned a $64 fair value estimate.

In order for the stock to reverse its downward trajectory, the retailer will need to show investors its ability to increase profitability on earnings day. But overall, there is more long-term upside than downside while shares trade near the $40 range.

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^{Note this is not a buy or sell recommendation on any company mentioned.}