Is It Time To Re-Consider Best Buy Co Inc (BBY)?
One of the few stocks to come back strongly after the recent worldwide drop in stocks due to concerns on China was Best Buy Co Inc (NYSE:BBY). The primary reasons for the strong rebound were the robust financial numbers reported by the company for the second quarter. The retailer was accused of being ‘not serious enough’ in translating into buying from the inquiries it gets. The worst is that some people even charge the company as a showroom of Amazon.com, Inc. (NASDAQ:AMZN) because the consumers try out the products in the retailer but order them in Amazon. However, without bothering these issues, let’s look at some of the positives that the electronics retailer delivered in the past. That will provide a few ideas as to whether it is the right time to enter the counter.
The Biggest Positives
In the last two years, or eight quarters, Best Buy Co Inc (NYSE:BBY) delivered earnings that consistently topped the Street analysts’ expectations by a solid margin. The lowest positive surprise margin was 9.6% while the next positive surprise level was 22.77%. In the other six quarters, the percentage of positive surprise varied between 27.6% and 65.0%. That came in due to its strong performance in the electronics segment. In this respect, the observation of its CEO, Hubert Joly, assumes importance. The overall demand from the consumer for the technology products, as well as services, is growing. That includes mobile phones and appliances.
Also, the uptick is fueled by technology, as well as innovation in product, apart from micro factors like population, recovery in the housing, and healthy living trends. That was responsible for driving momentum in Best Buy Co Inc (NYSE:BBY)’s appliance, connected homes, home theater, wearable business, and health. He also believes that these factors will continue to provide favorable catalysts in the coming quarters too. The company is gaining its market share during the second quarter. That could be seen from the way the comparable store sales witnessed growth.
Comparable Sales Growth
For instance, the comparable store sales of the industry witnessed a drop of 1.9% in the second quarter. On the other hand, the big box retailer reported 3.8% growth in its domestic comparable sales. That came on top of a 2.0% growth achieved in the first quarter. The most recent quarter was the fourth straight quarter of positive domestic comparable store sales uptick. That suggests that the company could have gained its market share. Additionally, the retailer witnessed a favorable start to the back-to-school season. That is one more sign of positives.
Best Buy Co Inc (NYSE:BBY)’s CEO, Joly, attributed these positives to the affirmation of its tactical offering of advice, and service apart from convenience at competitive prices. The company has also been taking steps to enhance service and at the same time cut down its costs. That will enable it to compete with Internet retailers profitably. That has become necessary in the wake of the consumers shifting towards online. The big box store witnessed 17.0% growth in its comparable online sales in the second quarter. That was due to its investments in fresh capabilities to fuel higher traffic, as well as increased conversion rates.
Recently, Best Buy Co Inc (NYSE:BBY)’s CEO, Joly, confirmed that the demand for Apple Inc. (NASDAQ:AAPL) products, especially Apple Watch, are very strong. The tech bellwether firm’s products have been having a favorable impact on the retailer’s stores. Its wearable was a standout in its recent quarterly numbers. The fact that it is expanding the Apple Watches to all 1,050 big-box stores suggests the kind of impact it had on its performance. The retailer will also be adding 30 of its mobile stores before September end to sell Apple Watch. Originally, the electronics retailer was planning to sell only from 300 locations till the holiday season in the current year.
The retailer is also preparing very well for the upcoming holiday season. For that, the company is going to upgrade shop-in-shops at 740 locations along with fresh fixtures, as well as display tables for computers, tablets, and phones. The company has already completed upgrades at 350 stores whereas 170 more locations would be completed before the commencement of the holiday season. Best Buy Co Inc (NYSE:BBY) is planning to sell AppleCare product service, as well as support for the current quarter. The big box retailer will turn 50 locations into an authorized service provider. Till a few months ago or so, the electronics leader was avoiding Apple Pay, and it now becomes a strong supporter of growth.
The valuation metrics appear to be on the retailer’s side. The trailing profit earnings ratio is 15.77 while the forward profit earnings ratio is low at 12.82. Also, price-to-sales ratio is very low at 0.31. Similarly, price-to-cash flow is also lower at 8.30 while the profit earnings growth ratio is 0.91, which is also low. Aside from these, Best Buy Co Inc (NYSE:BBY) Enterprise Value versus EBITDA ratio is also lower at 4.69. That means it was the 15th lowest in S&P components.
James O’Shaughnessy has done some research of back testing. According to him, the lowest Enterprise Value versus EBITDA ratio has always given the best return. Therefore, one can expect a similar thing from the big box retailer.
While the company boosted its normal quarterly dividend by 21%, the retailer has also resumed a share buyback program under its current $5 billion authorization. The company is planning to buy-back $1 billion worth of stock in the next three years. During the second quarter, the company bought back $321 million worth of shares. The data convinces that the company is also serious in returning the capital to the shareholders.
Given the two years of consistently beating the analysts’ expectations by a wide margin, Best Buy Co Inc (NYSE:BBY) appears to be the right pick. The valuation is clearly on its side, offering enough upside rewards still. Also, the coming quarters will be the most crucial one for the retailers. Thanksgiving Day, Black Friday, and Cyber Monday will set the tone for solid retail sales since the weak oil and gas price will boost consumer spending.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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