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Matt Blecker
Matt Blecker
Articles (7)  | Author's Website |

Best Buy Is a Better Long-Term Investment than Amazon: The Case Still Stands

April 04, 2012 | About:

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Rating: 4.4/5 (57 votes)

Comments

superguru
Superguru - 4 years ago
reminds me of blockbuster versus netflix.
Matt Blecker
Matt Blecker - 4 years ago


Superguru,

You are way off base. Please provide some evidence. Blockbuster struggled to be profitable way before Netflix was in existence. For example, in 1999 and 2000 Blockbuster generated net losses of 44 and 43 cents per share respectively. Additionally, interest expense in those years was $116-119 million which is similar to Best Buy's interest expense. Only Blockbuster posted revenues around $4 billion those years while Best Buy's revenues now exceed $50 billion. This highlights Blockbuster's significantly greater leverage. The profitability of the two companies is not even comparable.

Perhaps you should compare Amazon to Netflix, i.e. costs rising as fast or faster than revenues.
forexnutca
Forexnutca - 4 years ago
Excellent analysis. It's often easy to make assumptions in the stock market like Best Buy is the next Blockbuster, but you back your thesis with real numbers. In the wise words of Philip Fisher "The stock market is filled with individuals who know the price of everything, but the value of nothing"
twdiggs
Twdiggs - 4 years ago
I agree with you I would much much rather invest in BBY than Amazon (I don't know Best Buy as a business well enough to feel comfortable making it a large position but it is definitely statistically cheap). I'm biased against paired trades especially in this situation.... while investors most likely won't be going to run it up to insane multiples that cause investors to lose their staying power (I guess you never can be surprised with people's position sizes though) I think their is easier value out there and the paired trade is risky compared to a simple long only. IMO the paired combination isn't worth the potential pain and volatility.

Matt Blecker
Matt Blecker - 4 years ago
Forexnutca,

Thanks for the comments. The PF comment is so true.

Twdiggs,

Totally agree with you. I only have 3 short holdings and they are small pieces of my portfolio. With client portfolios we hardly ever short, as short equity positions represent less than 1% of our total portfolios. It is definitely tough, as you never know how long a stock can stay overvalued. Could be 5-10 years in some cases.

jayb718
Jayb718 - 4 years ago
First off, Thanks for having the patience and taking the time to write this.

Questions: What would happen if you factored in Best Buy's lease obligations? Wouldn't that weaken the balance a bit and negatively effect the solvency ratios compared to Amazon?

Also, dealing with electronics, doesn't inventory turnover play a role in comparing these retailers?

Thanks again.
michaelwang18
Michaelwang18 - 4 years ago
Nice analysis Matt. I do not know if I would short AMZN, but I am long BBY. My calculation of BBY FCF/EV now is over 20%. Although revenue may not grow or even shrink, margin improvements should more or less offset. Plus management's decision of capital allocation looks pretty good as you mentioned.

And David Einhorn and Bill Nygren adding BBY shares...
Matt Blecker
Matt Blecker - 4 years ago


Jay,

Best Buy's operating lease commitments are manageable and fairly typical for the retail industry. They discuss this issue a bit in their latest 10q. Their annual rental expense is approximately $1.2 billion, representing less than 2.5% of their annual revenues. Their total commitments are approximately 8x rental expense, an acceptable number in comparison to other retailers. Expect rental expense to come down slightly in the future as they eliminate several unprofitable big box stores and cut square footage.

Inventory turnover should be watched, and while Amazon has had better inventory turnover than Best Buy, the numbers are now much closer. Best Buy's numbers have hovered around 7 for the past decade, while Amazon's numbers were in the mid teens earlier in the decade and have now slipped slightly below 10.

redbank199
Redbank199 - 4 years ago
Using Google Finance web site to compare the stock performance of AMZN vs BBY

for the time frame from 1 month 10 years, I see BBY outperformed AMZN only for

the trailing 6-month period. I know the usual disclaimer about looking at past performance,

but I would need lots of patience and nerves to tell myself that BBY will turn around

and beat AMZN in the future. If I were a teacher, AMZN is like a A student, and BBY is like a

C student, would I bet my money on a student performing at C for a long time ? I may if I am

a 20 years old ...

Jean-Francois Nobert
Jean-Francois Nobert premium member - 4 years ago
Thank for sharing Matt,

My thinking could be different and i wish i'm wrong and i wish you a right. Here is my explanation:

The level of debt in USA is realy high, the interest rate close to 0. The europeen have not solve their the core problem of their Crisis yet , the overall market is currently modestly overvalue in the USA according to the latest market valuation. If the market have to fall, BBY will fall too, what ever is the margin of safety, because it will follow the movement of the ETF and Fund that have invest in it, regarding to the market point, rule of divesification, etc. Instead of a value point of view. And the money you have invest in BBY will not be as efficient at this time as if you had cash.

As Keynes af said before sometime the "markets can remain irrational far longer than you or I can remain solvent." In this case it could be BBY with a quick ratio of 0.52, a total debt to equity of 50.57% and a S&P credit rating of BBB-.

With a intrest rate close to 0 i doubt it could go lower and i could be wrong but if the interest grow i'm not sure BBY will be able to keep the EPS groth rate they use to have in the past. So even if the price may seem attractive, with a margin of safety of 80% and a Businness Predictability of 4stars and half and a PE of 6. I would rethink of it.

In this king of environement if you realy want to own stock in the US, i would realy go with company with great finance, that have better financial health.

Jean-François

Gaffey
Gaffey - 3 years ago


Great article. AMZN looked overvalued after a quick glance at their balance sheet. Your article confirmed it. Thanks. Best Buy Q1 net margin dropped substantially due to managements decision to buy out Best Buy Mobile. Does that change your thesis at all?

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