Bear Up And Bear Down With Build-A-Bear Workshop's High Expectations

Adam Bettcher

Build-A-Bear Workshop, Inc. (NYSE:BBW) has high-profit expectations pinch a semipermanent attraction connected engagement spanning generations. Unfortunately, early investors whitethorn person stuffed their ears pursuing its mid-2015 worth trap infamy and nan consequent 80% driblet complete 5 years. The symptom of holding a downtrending institution whitethorn person caused divestment without a due re-entry plan.

I judge nan current-day Build-A-Bear, classed first successful its industry, is simply a monolithic betterment complete its predecessor. While inexpensive connected aggregate valuation metrics, overvaluation connected nan classical Book/Price metric hides it from nan astir accepted worth investors’ view. In addition, it has an awesome return history alongside important profitability expectations group by management. All while individual ETFs clasp good nether a afloat percent allocation. In my view, this patient has convincing capacity and is importantly profitable yet simultaneously profoundly undervalued, starring to my Strong Buy standing connected BBW banal contempt existent uncertainty.

Strong Profitability And Expansion

Build-A-Bear has a celebrated world marque serving customized stuffed animals and characters via engrossing experiences to each ages. It precocious raised its guidance for fiscal 2022, expecting to group a caller profitability grounds for its 25-year history. Details of nan high-quality expectations are expanded connected successful nan company's IRC Conference 2023 presentation.

Notable mentions see nan moat-like aspects forming alongside nan company's continued growth. At acquisition locations, astir a 3rd of income are to teens and adults arsenic nan 'owner' of nan bear. Of online orders, 70% of income are to teens/adults arsenic nan 'owner'. I judge this, coupled pinch nan experiential focus, precocious marque awareness, and expanding integer request growth, whitethorn supply a beardown moat moreover during a recession.

Build-A-Bear Workshop

In addition, nan position included cardinal specifications regarding financial realizations and guardant expectations. These reside full revenues, pre-tax income, and EBITDA. According to nan presentation, nan first 9 months of 2022 achieved $322.8mm successful full revenue, $35.7mm successful pre-tax income, and $45.0mm successful EBITDA. Each of these is simply a record-setter successful nan company's history.

Build-A-Bear Workshop

At nan aforesaid time, Build-A-Bear has made galore headlines precocious for expanding its trading efforts. In December, nan firm's Tycoon game launched connected Roblox, placing nan company's marque successful kids' ever-present virtual worlds. Afterward, connected January 9th, BBW announced their caller Senior Vice Present and Chief Technology Officer.

Come January 17th, Build-A-Bear CEO, Sharon Price John, released a 232-page inspirational book, "Stories & Heart: Unlock nan Power of Personal Stories to Create a Life You Love," that includes actionable exercises for individual maturation anyone tin instrumentality successful their ain lives. Simultaneous pinch nan motorboat of Ms. John's Stories & Heart podcast series, it further places nan ever-meaningful marque successful beforehand of older property groups.

Performance since 2015

Longtime worth investors successful Build-A-Bear Workshop mightiness not person looked astatine nan banal since its mid-2015 Value Dip connected June 1st, 2015, and nan consequent driblet complete nan years. A buy-and-hold investor would person endured a 5-year play pinch a full drawdown of complete 85%. Even nan astir ardent worth investor apt struggled to clasp done that period.

Data by YCharts

Today, their mid-2015 rule would person a specified 59.39% return. For reference, an investor getting successful mid-2021, a twelvemonth aft capacity reversed to nan upside, would person achieved a 50.31% return successful conscionable complete a year's time.

Data by YCharts

Valuation

I find that nan valuation of Build-A-Bear Workshop is inexpensive connected each metrics beneath isolated from for nan classical Book/Price metric.

At only nan 30th percentile of worth connected nan Book/Price metric, nan stock's deficiency of sum whitethorn beryllium because nan astir accepted worth metric does not decently bespeak its cheapness. This would lead to book-value-focused strategies and managers not paying overmuch attention. On nan different hand, galore modern portfolio managers person moved connected from nan B/P metric. They judge B/P is chiefly flawed because it tends to understate intangible and semipermanent assets.

Compiled by Author utilizing information from Alpha Architect.

However, we tin besides spot really inexpensive it is comparative to its Consumer Discretionary sector, utilizing Seeking Alpha's valuation grade:

Seeking Alpha

Along pinch an wide B+, we spot a akin consequence pinch only price/book and price/cash travel considered overvalued comparative to nan remainder of nan sector.

Unfortunately, it's still imaginable that an finance successful BBW is catching a falling knife. To find whether this is apt to beryllium a worth trap today, we tin analyse nan performance's expected guardant direction.

Momentum Significance Analysis

Below are signals to foretell capacity directionality. Ordered from nan astir important predictor of nan pursuing quarter's capacity to nan slightest significant, pinch capacity recorded arsenic of End-of-Day Tuesday.

Compiled by Author utilizing information from YCharts

While nan 2-week and 1-month periods are nan astir apt to reverse, nan 12-Month Momentum (excluding 2-Week Momentum) is nan astir apt to continue. The further Momentum metrics verify nan consistency of Momentum complete nan full-time period.

This consistency of affirmative capacity indicates an investor should expect affirmative capacity successful nan adjacent early arsenic well. This assumes a consequence doesn't yearn its disfigured caput erstwhile investors aren't paying capable attention.

Risks May Bear Out A 'Value Trap' Thesis

Now, while I judge nan 2015 worth trap driblet sufficiently explains nan deficiency of coverage, it cannot relationship for nan exceptionally debased percent held wrong systematic ETF strategies. For example, nan 6th largest allocation wrong ETFs is held by nan Avantis U.S. Small Cap Value ETF (AVUV) I covered previously.

Data: Alpha Architect, FactSet; Chart: Canva

While 1 mentation could beryllium that nan debased price/book metric prevents a precocious weighting, I judge location whitethorn beryllium different if we flip nan attraction from valuation backmost to momentum. Specifically, if we see volatility, it is not benignant to nan Momentum value study posted earlier. I explained this conception successful a recent article,

Although nan Momentum metrics constituent towards affirmative capacity complete nan pursuing months, nan 'Frog-in-the-Pan' mentation states that momentum strategies thin to beryllium much profitable successful upward-facing markets and markets pinch little volatility. As discussed earlier, these aren't needfully upward-facing markets, fixed little expected returns than riskless treasuries...

To analyse this volatility quickly, 1 could eyeball nan past capacity floor plan complete nan past 10 months and comparison it to a beautifully elemental floor plan Alpha Architect's CEO, Wesley Gray, drew up for a 'Frog-in-the-Pan' explanation.

For reference, we tin comparison nan volatility of Build-a-Bear Workshop to nan Alpha Architect U.S. Quantitative Momentum ETF's (QMOM) largest holding, Valaris Ltd (VAL). While some stocks person conscionable nether 60% monthly modular deviation, nan number isn't what matters most. It's much important to announcement nan consistency (or deficiency thereof) regarding said volatility.

Data by YCharts

As seen above, location person been immoderate ample spikes and falls successful BBW's capacity complete nan past 10 months. This spiky deficiency of consistency whitethorn beryllium 1 imaginable origin of BBW's debased weighting wrong ETF strategies, arsenic it poses an further risk.

Takeaway

In my view, Build-A-Bear is an undervalued manufacture leader pinch upward Momentum and beardown marque value. With accordant news of description beyond its first target market, I judge Build-A-Bear is forming a generational moat.

Even arsenic Build-A-Bear's Momentum appears rather important connected an first pass-through, it whitethorn move into what I would categorize arsenic a 'Momentum trap' alternatively of nan Value trap knowledgeable successful 2015. Furthermore, I judge its volatility patterns whitethorn airs an further risk.

In my view, this could make a awesome campaigner for a worth aliases value portfolio for nan long-term. Despite nan volatility, this unnoticed company's important profitability and heavy undervaluation amidst convincing capacity carnivore retired my Strong Buy rating.

Daniel Kinskey-Lebeda is simply a moderator of nan Rational Reminder Community, a organization built for listeners of nan Rational Reminder Podcast (https://rationalreminder.ca/podcast-directory) to convene connected podcast topics and everything investing. The Rational Reminder Podcast is simply a play podcast connected sensible investing and financial decision-making. Each week nan podcast discusses topics related to individual finance, investing, behavior, and financial markets pinch nan volition of making their listeners better, much logical investors. Their listeners return to nan Rational Reminder Community to proceed nan chat successful awesome extent pinch nan occasional master taking portion arsenic well.My writings are information study and opinions, not finance advice. They whitethorn incorporate inaccurate information, contempt dedicated investigation efforts. Readers are responsible for doing their ain owed diligence and are encouraged to do their ain investigation and study crossed various sources.