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Best Buy Not a Buy, Aaron's Is
Posted by: mdhargrave (IP Logged)
Date: March 19, 2013 10:01AM

Best Buy (BBY) has seen an interesting rebound in its stock price over the past few months, this despite the retailer's founder, Richard Schulze, announcing that any possibility of a buyout was off the table. Schulze's speculated off to take Best Buy private, back in August, was said to be upwards of $24 per share. Schulze, owning 20% of the brick-n-mortar company, was hoping to pull off a management led buyout to take the company private and revamp its deteriorating business model. Despite Schulze's decision not to pursue a buyout, the stock still moved higher. However, I remain cautious on the brick-and-mortar retailer, and would rather look to Aaron's Inc. (AAN) to gain some exposure to the electronics retail market.

How are Best Buy's competitors faring?

GameStop (GME), another major consumer electronics retailer, has also seen weakness lately. Its recent holiday sales, for the nine weeks ending Dec. 29, 2012, dropped 4.6% from the same period last year. This big drop was driven by the a 15.6% fall in the pre-owned sales category on a year-over-year basis. GameStop has a lot of exposure to the video game industry, a relatively niche industry. Expected new gaming equipment releases should help boost revenues in the interim. However, the alternatives popping up in the video game marketplace, namely online gaming, should only continue to pressure the stock in the long term.

RadioShack Corporation (RSH) has been struggling the most, and is down 50% over the last 12 months. The company is expected to post an EPS loss of $0.44 for 2013, which is in large part due to its transition to a lower-margin mobile business. RadioShack is seeing competition from Best Buy as it too looks to mobile with its rollout of smaller mobile stores, which will indeed infringe upon RaidoShack's initiative to become mobile phone focused. One of the overwhelming reasons for RadioShack's big fall is that its "core" business is consumer electronics, where this specific segment has seem some of the most pressure from ecommerce company Amazon and should continue to see pressure going forward.

Aaron's announced projected EPS earlier this month for the first quarter 2013 that should come in at $0.74 to $0.75, versus analysts' estimates of at $0.71. For 2013, management targets new store growth of about 5% year over year, while also looking to execute its recent strategy of acquiring franchised stores and selling underperforming company-operated stores. The company is also very good at attracting returning customers. Comps at company-owned stores were up 4.6% last quarter year over year, on the back of 7.8% growth in customer traffic; meanwhile, comps at the company-franchised stores were up 6.5% on the back of a 9.6% increase in customer traffic.

Aaron's Is Also Better by the Numbers

Even with the recent struggles of Best Buy and Radioshack, Aaron's remains way cheaper:

Price to Cash Flow
  • Best Buy 8.9 times
  • GameStop -17
  • RadioShack 16.7
  • Aaron's 3.1
Not to mention, Aaron's offers growth at a reasonable price, with a PEG of 1.0, well below its peers:

Price to Earnings to Growth
  • Best Buy 3.4 times
  • GameStop -2.7
  • RadioShack n/a
  • Aaron's 1.0
Aaron's is also one of the industry leaders when it comes to returns and profitability.

Return on Equity
  • Best Buy -7%
  • GameStop -13%
  • RadioShack -9%
  • Aaron's 16%
Operating Margin (TTM)
  • Best Buy 3%
  • GameStop 7%
  • RadioShack n/a
  • Aaron's 11.5%
I am disappointed Schulze couldn't put together the funds to pull off a buyout and still fear that Best Buy could end up like a bankrupt and non-existent Circuit City. Best Buy has also suspended its future share buybacks and is refraining from providing earnings projections for fiscal 2013. Wall Street expects 2014 Best Buy EPS (ending January) to come in down 20% year over year, while the average price target on the company is only $16.70, 12% below where the stock is trading.

While I'm not interested in investing in electronics retail leader Best Buy, there is another "off the radar" (see all Aaron's hedge fund owners) stock that could be a solid investment. Aaron's is cheaper than the other notable retailers on a valuation basis and has better return prospects. The company also pays a very modest 0.24% dividend, yet what's interesting is that the current dividend payout is only 3.5% of earnings or $7 million, versus the $129 million of cash on hand. If the company did decide to move its payout to 50% of earnings, the dividend yield would be upwards of 4%.

Be sure to check out our detailed stock analysis (click here).

Stocks Discussed: AAN, BBY, GME, RSH,
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