Is Best Buy in Danger?

With shares of Best Buy Co. (NYSE:BBY) trading at around $21.91, is BBY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Electronic retailers are dying. Consumers can now find everything from office supplies to electronics to furniture at online retailers like Amazon.com Inc. (NASDAQ:AMZN). Consumers can also find all of the above and more, including groceries, at Wal-Mart Stores Inc. (NYSE:WMT). In a world of time constraints, consumers want to tackle as many errands as possible in one location. Therefore, if someone can purchase groceries and electronics in the same trip, they will obviously choose Wal-Mart over Best Buy. In some cases, a consumer will do all their shopping at an online retailer. Of course, this excludes groceries. Does all this mean that Best Buy is a hopeless case, or is there potential going forward?

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Best Buy’s number one goal is to reduce costs. This can help for a significant amount of time, but what about the long haul? What about the top line? What will be done to accelerate growth? The goal should be to thrive, not just survive. In an economic environment where the consumer is weak and the competition is fierce, those looking to survive will die, and only those capable of thriving will survive.

Best Buy has changed its game plan. Best Buy stores will soon look more like Apple Inc. (NASDAQ:AAPL) stores than Best Buy stores. This is a popular trend at the moment, but if many retailers are hopping on this bandwagon, is it going to allow that retailer to stand out? No.

Best Buy has closed underperforming stores, which is a good start. It helps solve the current problem, but it doesn’t help establish a long-term solution. All that said, Best Buy recently beat expectations on revenue and earnings. This is a good sign. However, should a diluted EPS of -$1.21 really get investors excited? This was a significant improvement from a diluted EPS of -$4.60 a year earlier, but there is still a lot of ground to cover before reestablishing profitability. Fortunately, future estimates are strong. It will be interesting to see how it all plays out.

The chart below compares fundamentals for Best Buy, Amazon, and Wal-Mart. These three companies differ greatly in size. Best Buy has a market cap of $7.34 billion, Amazon has a market cap of $120.00 billion, and Wal-Mart has a market cap of $294.77 billion.

BBY

AMZN

WMT

Trailing   P/E

N/A

N/A

15.11

Forward   P/E

9.25

73.74

12.90

Profit   Margin

-0.98%

-0.06%

3.62%

ROE

-11.54%

-0.49%

22.42%

Operating   Cash Flow

$1.59 Billion

$4.18 Billion

 $25.59 Billion

Dividend   Yield

3.10%

N/A

2.50%

Short   Position

14.00%

N/A

2.00%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for Best Buy is higher than the industry average of 0.30, but it still qualifies as normal.

Debt-To-Equity

Cash

Long-Term Debt

BBY

0.62

$1.83 Billion

$2.30 Billion

AMZN

0.54

$11.45 Billion

$4.38 Billion

WMT

0.66

$7.81 Billion

$54.23 Billion

 

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T = Technicals Are Strong

Best Buy has been one of the hottest stocks throughout the broader market year-to-date. It has easily outperformed Amazon and Wal-Mart over that time frame. However, over the past three years, Best Buy has easily been the weakest of the three. Best Buy is also the only company of the three that doesn’t offer any yield.

1 Month

Year-To-Date

1 Year

3 Year

BBY

28.67%

86.33%

-2.54%

-43.97%

AMZN

-1.41%

4.43%

31.22%

98.76%

WMT

7.56%

13.09%

29.50%

48.91%

 

At $21.91, Best Buy is trading above all its averages.

50-Day   SMA

18.24

100-Day   SMA

15.61

200-Day   SMA

16.99

 

E = Earnings Are Unimpressive           

Revenue has been stagnant on an annual basis, which is a potential warning sign for the future. Earnings have bounced back a little, but they’re still poor.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

45.02

49.24

49.75

50.70

49.62

Diluted   EPS ($)

2.39

3.10

3.08

-3.36

-0.73

 

When we look at the last quarter on a year-over-year basis, we see improvements in revenue and earnings.

2/2012

4/2012

7/2012

10/2012

1/2013

Revenue   ($)in   billions

16.32

11.61

10.55

10.75

16.71

Diluted   EPS ($)

-4.60

0.46

0.04

-0.03

-1.21

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Do Not Support the Industry

There is a changing landscape in retail. The competition is much more intense than several years ago, and that competition is coming from all different directions. It would be difficult to imagine a scenario where Best Buy outmaneuvers its competitors over the long haul. However, it’s possible. Another challenge is that the average household income is lower than several years ago, which means a decrease in discretionary income.

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Conclusion

We want to see sustained annual revenue growth. Quarterly results don’t mean much when looking at the big picture. Cash flow is good, which is a plus, but making the right moves with that cash will still be a challenge. Margins are poor, but that might improve going forward.

If trends remained the same for Best Buy and it were involved in a marathon (not a sprint), it wouldn’t win the marathon and it wouldn’t faint. It would walk to the finish line, not impressing anyone or requiring emergency services.

Best Buy is a WAIT AND SEE.

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