Best Buy: A great buy?

New management is turning around this previously-troubled consumer electronic retailer.

By TheStockAdvisors Jul 25, 2013 11:28AM

Shoppers move through a Best Buy store on November 23, 2012 in Naples, Florida (copyright Spencer Platt/Getty Images)By Tyler Laundon, 100% Letter

Everything seemed to be going wrong for Best Buy (BBY) last year. Restructuring charges and other items resulted in a net loss of $1.7 billion in the quarter ending March, 2012.

Rumors of bankruptcy began to swirl. The company's CEO, Brian Dunn, resigned abruptly in April 2012. And the stock was plummeting. The shares had fallen by more than 70% from April 2007. It looked like it would follow Circuit City into liquidation.

But Best Buy is refusing to die. It has made some massive changes. It's beginning to fight back, reinventing itself and working to give customers what they want.

Wall Street is now getting back on board as evidence mounts that this turnaround story will have a fairytale ending for those long BBY shares. Since Dunn resigned, the shares are up more than 50%, even though the company is still losing money.

All great turnaround stories begin at the top and BBY is no different. Leading the charge are two executives better suited than Dunn (who rose through the ranks from salesperson to CEO) to navigate the new world of retail: Hubert Joly as CEO (hired August, 2012) and Sharon McCollam as CFO (hired December, 2012).

Joly's previous posts as CEO of Carlson Travel and as a partner with McKinsey & Company will refocus BBY on the customer, and he should implement a systematic approach to rebuilding the company.

McCollam was previously CFO and CEO for Williams-Sonoma, so has great experience in the retail (an importantly, online retail) environment. Both of these executives appear to be winners.

Led by Joly and McCollam, Best Buy appears to be focused on the future and not what may have worked in the past. The team is creating a new vision and culture at a company with great brand recognition but horrible customer satisfaction.

Almost all of the following catalysts are a result of new management, a new vision and deliberately revamped operations. These guys will lead the charge.

Another major improvement to the Best Buy shopping experience is a revamped store layout. It has recently inked deals with both Samsung and Microsoft (MSFT) to operate In-Store Brand Name Shops. (Microsoft owns and publishes Top Stocks, an MSN Money site.)

This story won't unfold in a month, or even just in 2013. It's going to take time and a lot of hard work to establish high levels of customer loyalty and revenue and profit growth.But progress is already being made and BBY's new management team appears well suited to do this job.

While there are a lot of moving parts to model here, it's reasonable to assume that within the next three years BBY should be able to earn around $3.00 per share -- about $0.10 less than it earned in both 2010 and 2011.

Upside could be much more, but assuming $3.00 is reasonable, the stock trades with a dirt cheap forward price-to-earnings ratio of just 9.4. Given its upside potential, cheap valuation and 2.3% dividend yield, we think Best Buy is a great buy.

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