Brilliant and Collins (2014) observes that companies have durable advantage or Economic Moats from if they exhibit:
An extensive network of users
Intangible assets that prevent competitors from duplicating their products
Cost advantage over their competitors and ability to earn high margins
Switching costs that serve to deter customers from switching to other service providers
Efficient scale when the niche market is better served by one provider
The financial analysis on Bed Bath indicate that while it is a profitable and stable company it does not have any Economic Moat that will give it durable competitive advantage. In terms of stability, Bed Bath appears at low risk of bankruptcy with an Altman Z-Score of 5.94344 and a Piotroski F score of 4 indicating a low likelihood of bankruptcy. The value indicators show that Bed and Bath posted a ROIC of about 20% as compared to an industry average of 12% indicating ability to earn superior returns as compared to competitors. However, the Profitability ratios give mixed signals with the gross profit being on the borderline of 40% while the net profit margin is significantly below the required threshold of 20%. In fact, the net profit margin averages at about 9% indicating that the company is facing competition. Similarly, the FCF margins average at about 8% and this is below the required threshold of greater than 10% for companies with durable competitive advantage.
The FCF valuation suggest an intrinsic value per share of $39.36 which is 11% below the current market price of $43.69 suggesting that the share is currently overpriced and an investor should sell the share instead of buying . While Bed and Bath is a stable company, it does not have the Economic Moats to give it the ability to earn superior returns in the long-term.
Reference list
Brilliant, H., & Collins, E. (2014). Why moats matter: The Morningstar approach to stock
investing.
