Investment Rationale
“We continue to have confidence in Best Buy’s ability to execute on its growth strategy. In addition to capitalizing on the strength of the current consumer electronics product cycle, we believe BBY is positioned to grow its market share through initiatives such as the Best Buy for Business, Geek Squad, and Magnolia store within-a-store offerings. Combined with BBY’s customer focus, we think these initiatives will enable BBY to continue to differentiate itself in a competitive marketplace. Trading at under 15x out FY-08 estimate, a modest discount to historical averages and peers, the shares are extremely attractive, in our view.”
“Risks to our recommendation and target price include a sharp decline in the economic climate and consumer confidence, and the risk that BBY will be unable to successfully execute its strategic objectives and meet market expectations for sales growth and profitability.”
Business Summary
… “Some 40% of Best Buy stores have been converted or opened with the customer-centric operating model, and BBY is committed to scaling BBY customer-centricity across the organization…”
… “We believe BBY has about five years of organic growth potential from its core business.”
“In FY 96 BBY’s operating margin was 1.3%, trailing the Computer and Electronics Retail Sub-industry average margin of 3.9%. In FY 06, BBY generated operating margins of 5.3%, above the sub-industry average margin of 4.7%. As a basis for further comparison, Circuit City…,BBY’s closet peer, generated an operating margin of 4.4% in FY 96, declining to 1.2% in FY 06.”
“BBY is targeting an operating margin of 7% in FY 08, a goal that we consider achievable.”
“EPS grew at a five-year CAGR of 22.1% from FY 01 FY 06…We expect BBY to generate EPS growth of 10% to 15% over the next five years.”
“For the five years ended FY 06, BBY posted a five-year CAGR in sales of 15.2%, surpassing the Computer and Electronics Retail Sub-industry average CAGR of 9.2%.
“BBY’s FY 06 return on invested capital (ROIC) was 18.7%, well above the ROIC for the Computer and Electronics Retail Sub-industry (16.7%) and the Consumer Discretionary Sector (5.3%). Driving BBY’s better relative performance were superior gross margins, a reduction in the cost of new store openings, and improved sales productivity at new stores. Going forward, we expect BBY to continue to generate ROICs that above the sub-industry and sector averages.”
Sub-Industry Outlook
“We think a healthy consumer electronics cycle, including hot products such as advanced TVs, MP3 players, and digital imaging products, will fuel sales growth in 2007. With our expectations for continued declines in average selling prices for advanced televisions, we think these products are becoming more affordable to average consumers.”
“At this point in the cycle, we see declines in average selling prices, which we think are hurting manufactures, but is helping drive demand and benefiting retail sales.”
At Smart Trades we looked at historical PE Ratios for the past 10-years and noted the following:
10-Year Average High PE Ratio 28.5
10-Year Average Low PE Ratio 11.4
The Company is currently trading at about 16.6x earnings (TTM).
Standard and Poors is projecting the following EPS numbers for 2007 and 2008:
2007 EPS Estimate $2.79
Current PE Ratio of 16.6 equals price of $46.13
10-Year Low PE Ratio equals price of $31.80
10-Year High PE Ratio equals price of $79.51
Standard and Poors PE Projection of 20 equals price of $55.80
2008 EPS Estimate $3.17
Current PE Ratio of 16.6 equals price of $52.62
10-Year Low PE Ratio equals price of $36.13
10-Year High PE Ratio equals price of $90.34
Standard and Poors PE Projection of 20 equals price of $63.40
Information on the Best Buy Customer Centricity Operating Model
Article Highlights
Centricity is also yielding financial results. The 67 segmented stores converted last year outperformed the rest of the chain, producing comp-store gains during the fourth quarter of 8.4% compared to 2.3% at other stores. And, gross profit rate was higher due to a more profitable merchandise mix, according to Anderson.
Customer Centricity - Best Buy Article
Another BBY Centricity Article
Letter to Shareholders
After studying the information in the most current 10-Q along with reading the Standard and Poors report it appears that Best Buy is currently trading at very attractive prices, when consideration is given for its financial results, which outperform every competitor, and its future growth prospects. When you read about the customer-centric operating model it appears this will yield solid returns for Best Buy.
Disclosures:
- Currently do not own shares of Best Buy
- No other relationship with the company.
Current Sentiment
Based the current research there appears to be a very strong case for rating Best Buy as a Strong Buy. We do think there are risks associated with the stock such as declines consumer confidence, especially if a prolonged downturn in the housing market leaves consumers feeling less affluent. From 2000 to 2006 the housing marked boomed and consumer confidence was very high as homeowners had access to equity for home improvements, such as high end entertainment systems. Although this risk is obviously present, it appears somewhat mitigated by the fact that Best Buy is the market leader in this segment, and should continue to see high future growth as it continues to migrate into higher end products. (Its 2007 acquisition of Pacific Sales in California was continued movement into the high end.) – The company’s most recent 10-Q details this acquisition.
Reminder: We are in no way recommending the purchase or sale of these stocks. This article is intended for education purposes only. Trading should be based on your own understanding of market conditions, price patterns and risk; our information is designed to contribute to your understanding.
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