Tuesday, May 15, 2007
S&P makes Best Buy a 'Best Buy'
Best Buy (NYSE:
BBY) was selected
Standard & Poor's The Outlook at its “Stock of the Week,” a pick that is chosen from among those stocks that earn the coveted 5-star strong buy ranking.
The service notes that it expects the retailer “to benefit from strength in consumer-electronics spending and an ability to outmaneuver competitors.” Here’s the reasoning behind making Best Buy, American’s largest specialty retailer of consumer electronics, a “best buy.”
“We think that the healthy consumer-electronics cycle will continue to propel sales and earnings growth despite an expected slowdown in consumer spending. We also think that aggressive expansion and a continued focus on service levels will allow Best Buy to increase overall market share and build loyalty with consumers.
"As of Mar. 3 of this year, it operated 869 Best Buy stores (822 in the U.S. and 47 in Canada), 20 Magnolia Audio Video stores, 14 Pacific Sales showrooms, and 12 Geek Squad stores in the U.S. It also operates 121 Future Shop stores in Canada, 135 Five-Star stores in China, and one Best Buy China store.
”While the market remains fairly fragmented, the top three players have a nearly 50% share. Best Buy leads the way with an approximately 25% share, followed by Wal-Mart, with 15%, and Circuit City, with 9%. Competition is fierce, and we believe that retailers who differentiate themselves, either through service, marketing, or product mix, will benefit.
”We expect further development and increased adoption of digital products to boost future sales of consumer electronics. Longer term, we expect a growing convergence between computers, televisions, cameras, and telecommunications equipment.
“Thanks in large part to a healthy consumer-electronics cycle, Best Buy recently posted revenue growth of 16.5% in fiscal 2007 ended February, including a same-store sales gain of 5.0%. Earnings per share increased 23%, to $2.79. While we expect growth to slow somewhat in fiscal 2008, we remain confident that strong product cycles will continue to drive impressive results at Best Buy.
”Because of its detailed attention to customer service, which we think differentiates the company from other low-cost retailers, we believe Best Buy will continue to remain the retailer of choice when consumers are seeking to purchase a new TV or home theater system.
”Global expansion remains a priority for Best Buy, and we believe the company can continue to drive strong square footage growth over the next several years, including global gains of approximately 10% in fiscal 2008 (this would represent the highest square footage increase for the company in several years).
“We also find the company’s Apple partnership to be promising. While nothing has been mentioned by the company yet regarding the Apple TV or iPhone, we think a relationship beyond computers and iPods would be beneficial for both parties.
”We believe Best Buy has one of the stronger balance sheets in our specialty retail coverage universe, with over $3.7 billion in cash and short-term investments (as of Mar. 3, 2007). In fact, Best Buy's net cash position equals about $6.50 per share. Excluding the net cash position, we note that Best Buy stock trades at just 13.2 times our fiscal 2008 EPS estimate.
”Our discounted cash flow (DCF) valuation suggests an intrinsic value of $63 for Best Buy shares. This value, which is also our 12-month target price, is about 30% above the recent price, and approximately 20 times our fiscal 2008 EPS estimate.
”Finally, we think the company's valuation is compelling. Best Buy shares trade at a price-to-earnings multiple below its peers and in line with the broader market, despite sporting greater growth potential and what we consider to be a stronger balance sheet. These factors help the stock earn Standard&Poor's highest investment ranking of 5 STARS (strong buy).”
posted at 3:51 PM
