EDWARD MARACCINI
PORTFOLIO MANAGER
JOHNSON FAMILY LARGE CAP VALUE FUND

COMPANY: Borders Group
TICKER: BGP (NYSE)
PRICE: $23.93 (as of 4 p.m. yesterday)
52-WEEK RANGE: $18.65-$26.29
MARKET CAPITALIZATION: $1.55 billion

Edward Maraccini is a portfolio manager at the Johnson Family Large Cap Value Fund (JFLCX). The Borders Group operates book, music, and movie superstores worldwide. Mr. Maraccini spoke to David Dalley of The New York Sun about why he believes the stock price could increase by at least 25% over the next 12 to 24 months.

What does Borders do?

They’re the second-largest operator of book superstores in the country. They sell books, music, movies, and stationery, and they typically have a coffee shop in the store as well. They have about 500 stores in the U.S., about 25 in the U.K., 11 in Australia, and three in Puerto Rico.

Why do you like the stock?

Firstly, as with any stock we buy, it has to be attractive on its valuation [price-to-earnings and price-to-cash flow], which this one is. It trades at about a 25% discount to the retail sector, whereas Barnes & Noble, a close peer, trades at a slight premium.

The second thing I like is that they have a very strong free cash flow and very low debt levels. Currently what they’re doing is converting and upgrading their stores. They’re improving the looks of the stores, they’re improving layout,and they’re improving the cafes. Those stores that they’re upgrading are already showing better comps [year-onyear same-store sales]. Once they’ve completed that process, in 2007-08, they’ll start returning a lot of cash to shareholders through dividends and buybacks.

Why is it trading at a discount?

Historically, for the last two years, same-store sales haven’t been as strong as at Barnes & Noble, so they’ve traded lower. But with the remodeling, samestore sales are improving, particularly for books. It’s happening already. Back in the middle of March they reported very strong fourth-quarter results which beat expectations, and that resulted in a significant improvement in the stock price.

Why is now the time to buy?

Once investors start to see the comps improve at the converted stores, people will realize the potential that this company has as a significant cash flow generator. There’s a lot of upside potential here, and it’ll start to show once management completes the store conversions over the next couple years.

What do you think the stock is worth?

If you look out into 2007-08, we project free cash flow at $170 million, which could very reasonably support a price in the low $30 range.

What are the risks?

The biggest risk is a drop in consumer spending. That’s related to all of the basic macroeconomic factors such as a rise in gas prices, high consumer debt, higher unemployment, etc. Anything that hurts retail sales generally would hurt Borders.