Inside Wall Street: Best Buy is a great deal

Despite grim headlines, investment pros who know the stock say this is a good time to buy.

By Gene Marcial Dec 15, 2011 11:02AM

Shares of Best Buy (BBY) have gotten slammed and will likely continue to stagger.


But don't panic. Some investment pros who know the largest retailer of consumer electronics quite well are saying the seemingly unthinkable: Buy Best Buy's stock. It is probably the cheapest deal in the store right now.  


That's definitely not mainstream thinking, however. So the stock has continued to fall even after plunging 14% to $25 a share Tuesday, when the company reported great sales gains for the third quarter but shocked investors with narrower gross margins and worse-than-expected earnings. The stock fell more Wednesday, closing at $23 amid frightening headlines about Best Buy's mixed quarterly results.


That's when some savvy pros stepped in to say that not only is this not a good time to dump Best Buy, but it's the right time to buy the stock.  


"We are reiterating our buy recommendation as we believe Best Buy, primarily based on its currently depressed valuation at just six times our earnings estimate for fiscal 2012, has become very attractive," said Michael Souers, an analyst at Standard & Poor's. He acknowledges that the prevalent concern about gross margins and stiff competition from online retailers is valid, as well investors' worry over the economy's near-term weakness.


"But we expect Best Buy to maintain its market-share leadership over the long term with exclusive products and customer-centric business model," said Souers, who is maintaining his 12-month price target of $31 a share. He is sticking with his earnings forecast for fiscal 2012, ending Jan. 31, of $3.39 a share, up from fiscal 2011's $3.08. For fiscal 2013, Souers figures Best Buy's earnings will rise to $3.68.


Best Buy's third-quarter "earnings miss represents a buying opportunity," argues John Baillie, an analyst at France’s Societe General, who has reiterated his buy recommendation on the stock, with a higher 12-month price target of $36 a share. He sees a disconnect between the positive message by management on the conference call and the drop in the stock and its low valuation. Management's earnings guidance for fiscal 2012 of $3.35 to $3.65 was unchanged despite the third-quarter outcome, and "we sense that the stronger November has carried through beyond Black Friday," Baillie said.


He says he's comfortable with retaining his broadly unchanged earnings-per-share forecast of $3.60. He remains encouraged by Best Buy's financial strength, "which is at the core of our 'buy' recommendation," he adds, with the company's free cash flow of $2 billion this year,  supporting a sustainable $1.5 billion a year share buyback, along with a "progressive dividend policy of 7% last quarter."


Baillie is upbeat about Best Buy's multichannel retail strategy, with online sales up 20% in the third quarter. On the products that Best Buy sells the most, the analyst says the important television category, which has been weak for a long time, "is showing signs of stabilizing."


Best Buy's vast operations include 1,081 stores in the U.S. and 80 Best Buy Mobile stand-alone outlets. S&P's Souers says Best Buy's decision to downsize its storage square footage is positive, as it would curb costs and boost operating margins.


As part of its strategic priorities, Best Buy will continue to try to capture new growth avenues and specifically target online opportunities, says Souers, as well as improve its market share in the international markets. The gaming and appliance markets is another source of growth that Best Buy is targeting, he adds.


Nonetheless, the company's Wall Street following remains iffy, with 17 of the 26 analysts recommending Best Buy as a "hold" and only seven rating it as a "buy." One recommends a "sell."


But that's a positive score for contrarians who sincerely believe that the more bearish the Street is on a stock, the more bullish you should be. Never follow the herd, I say.

Gene Marcial wrote Inside Wall Street for Business Week for 28 years and now writes the column for He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

Tags: BBY
Dec 15, 2011 4:39PM
Stromprophet, they are exactly like target...a retailer, pure and simple.  they sell other people's stuff.  in fact, they are more innovative than target in that they actually fix the stuff they sell ala geek squad, etc. they are not going bankrupt anytime soon.  nice try, though.
Dec 15, 2011 7:15PM
Stromprophet, they are exactly like target...a retailer, pure and simple.  they sell other people's stuff.  in fact, they are more innovative than target in that they actually fix the stuff they sell ala geek squad, etc. they are not going bankrupt anytime soon.  nice try, though.

As a former shareholder, I used to do my weekly research on this company (for the 2 years I held stock).


They are not exactly like target at all. Target sells clothes, food, household supplies, and all kinds of other consumer staples that will not be going away. Electronics is a very much in shift sector and almost exclusively best buy sells electronics.


They have to actually sell the stuff to get the part of the business that is high margin for them. The services (geek squad, which might have been innovative, 10+ years ago when they started it, what's new?), warranty packages, and so on. An interesting phenomenon that is actually happening is people go into best buy to look at what they want to buy in person, figure it out, and then proceed to buy it from a competitor online.



As to bankruptcy. I said 2012/2013 will bring further decline of the stock price and the eventual outcome is bankruptcy.


The disturbing signs are there.

  • Margins have been absolutely destroyed. 2.7% margin for an electronics retailer is just terrible (and that was a huge decline YoY)
  • There are some concerning developments in the accounts receivables the last 4 years. They have quadrapled to over 2 billion dollars from around 500 million a few years back. Yet actual sales have only increased 20%.
  • A lot of the EPS is coming from stock purchases the company is making.
  • And the outlook is just horrendous. Their competitors are bigger and far more efficient, able to operate at lower margins BB can't afford. The consumer landscape is not having significant improvement. Customer base isn't excited or as loyal as the past. No real expansion plans to at least try to capture new markets.

They discounted huge this quarter to move volume, I can only imagine those margins will be nothing. 2.7%, was for Q3. That's the most telling thing to me. There's no pricing power for them at all.


It's not going to end overnight, but if 2012 and 2013 are as difficult as they look, I would say they will start running into financing issues just like Circuit City eventually did.

Dec 15, 2011 3:04PM

A stock is only as cheap as what it is actually worth. A P/E of 6 doesn't mean anything without context.


Here's the context.


1) Best Buy has to sell services to be profitable (warranties on electronics, installations, services, etc)

2) The movement to less consumer PCs impacts them hugely. A lot of businesses, even small ones, don't really buy PCs from bestbuy, and that's really where the strength of PCs will continue, in offices. They make less money on tablets than PCs.

3) They have too many stores.

4) Their online sales and abilities just aren't that good. Amazon beats them easily with their shipping options and selection.


In my view, there are in the same spot Blockbuster was in 2006/2007 with the rise of Redbox/Hula/Youtube/Netflix.


And I think the same thing is in store for them. Bankruptcy and being bought by someone. The "heard" is simply thinking it's in a holding pattern waiting for economic improvement.


My opinion is that 2012 will remain turbulent, Bestbuy has *NO* exposure to emerging economies where some of the only consuming growth is found, and Americans will continue to have to cut spending, shore up balance sheets, etc for years to come as well as face paying more taxes at some point.


In this environment, I say they are on the path to collapse in 2012/2013 with the possibility of bankruptcy happening. Stock to 0. In the "short" term, maybe you get a good bounce or something depending.


Places that don't have moats (and they don't have any really) have to innovate and be competitive. They do neither. They haven't shown any innovation to drastically transform, bring new products, ideas, solutions. And they aren't being fervent enough about being competitive.


If it were me, I'd be getting out of all the leased stores they can, and selling what ones they can. Reducing floor space by 20% isn't enough. This isn't walmart, target, etc who sell other things and can keep that floor space.


They need to completely convert to an outlet store model now IMO. Or, a kind of niche type experience that apple stores generate with a very small floor space.


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