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

Why Best Buy Is a Better Purchase Than Amazon

September 23, 2011 | About:

Amazon (NASDAQ:AMZN) stock has had quite a run. Investors have bid up the stock tremendously, focusing on strong revenue growth and significant market share gains. In this article, I seek to show why enthusiasm for the stock is completely unfounded and why Amazon may present a good short opportunity.

As one of the largest, most successful Internet retailers, Amazon generates revenue from many products and services. Merchandise and content is purchased for resale from vendors and third-party sellers. In addition, Amazon manufactures and sells the Kindle e-reader.

One side note before I project Amazon's future revenues: The firm's financial health is extremely solid. Amazon's pristine balance sheet carries a tangible book value of $5.856 billion as of June 30, 2011, very little debt, and cash and marketable securities totaling $6.355 billion. Off-balance sheet operating and capital commitments are negligible, amounting to under $900 million per year, an extremely small percentage of Amazon's costs. The firm is equipped to handle a difficult economic environment due to its strong financial position.

Amazon divides revenue into two segments, North America and International, and further into three sub-segments: media, electronics and other general merchandise, and "other." The "other" segment represents insignificant non-retail activity plus Amazon Web Services (AWS).

The majority of revenue is derived from the media and electronics segments. The media segment consists primarily of book sales, but also other items such as music and DVDs. The electronics segment consists of many items such as computers, tablets and televisions, as well as non-electronics items. Amazon's future revenue will be determined primarily by their share of the global books and electronics markets. I will first project media segment revenues by examining the U.S. market for book sales.

As data from the U.S. Census Bureau shows, this is a slow-growth market:



Book Sales from the US Census Bureau:


(In Millions of $ per year)


2002


2003


2004


2005


2006


2007


2008


2009


2010


CAGR


Book Sales


15450


16236


16877


16889


16983


17184


16870


16051


15662


0.17%


Growth Rate


5.1%


3.9%


0.1%


0.6%


1.2%


-1.8%


-4.9%


-2.4%


Since this is a mature market, future growth within Amazon's domestic media segment must come from gaining market share. Below shows Amazon's strong revenue and market share gains since 2006:



North America Media Segment


2006


2007


2008


2009


2010


Net Sales


3582


4630


5350


5964


6881


Growth Rate


29.3%


15.6%


11.5%


15.4%


% Market Share


21.1%


26.9%


31.7%


37.2%


43.9%


US Books Sales (In Millions of $ per year)


16983


17184


16870


16051


15662


While still impressive, the growth rate within Amazon's domestic media segment has slowed because there is only so much revenue that can be generated from a mature market once a certain level of penetration is achieved. Amazon has shown the ability to increase market share 5-6% per year, to the point where they may control 75% of the market by 2016. Assuming a 1% growth rate in U.S. book sales the next five years, I project Amazon's domestic media segment revenues through 2016 below:



2011


2012


2013


2014


2015


2016


Revenue


7910


8787


9682


10594


11523


12469


Growth Rate


11.1%


10.2%


9.4%


8.8%


8.2%


% Market Share


50%


55%


60%


65%


70%


75%


Projected US Books Market


15819


15977


16137


16298


16461


16626


Growth Rate


1.00%


1.00%


1.00%


1.00%


1.00%


1.00%


Amazon's international media segment has also grown revenues significantly as shown below:



2006


2007


2008


2009


2010


International Media revenues


3485


4612


5734


6810


8007


Growth Rate


32.3%


24.3%


18.8%


17.6%


I project Amazon's international media revenues to grow slightly more than its domestic segment, due to significant opportunity within emerging markets:



2011


2012


2013


2014


2015


2016


Int. Media Revenue


9849


11819


13592


15630


17193


18913


Growth Rate


23%


20%


15%


15%


10%


10%


The U.S. electronics market is also a slow-growth market. However, it has grown faster than the market for book sales as shown below:



U.S. electronics and appliance store sales 2001-2010 bricks and mortar (in millions of $ per year)

Source: Department of Commerce


2000


2001


2002


2003


2004


2005


2006


2007


2008


2009


2010


10 yr CAGR


Revenue


82363


80395


83897


86796


94524


101449


107826


110849


108869


98384


100471


2%


Growth Rate


-2.39%


4.36%


3.46%


8.90%


7.33%


6.29%


2.80%


-1.79%


-9.63%


2.12%


If Amazon's electronics sales are added, the CAGR increases to nearly 3%. In an article dated July 5, 2011 by Steven Smith and Alan Wolf, it is estimated Amazon had $7.9 billion of electronics sales in 2010 within the U.S., representing approximately 72% of segment revenue in "electronics and other general merchandise."

Link: http://www.twice.com/article/470500Amazon_s_Gain_Is_Brick_and_Mortar_s_Pain_In_CE_Share_Shift.php

Below U.S. electronics sales are shown including sales from Amazon:



2000


2001


2002


2003


2004


2005


2006


2007


2008


2009


2010


10 yr CAGR


Total market with Amazon


82363


80810


84386


87427


95334


102486


109280


113104


112051


102919


108371


2.78%


Amazon has begun to take significant market share within electronics since 2005 as shown below:



2005


2006


2007


2008


2009


2010


Amazon US Electronics Revenue


1037


1454


2255


3182


4535


7900


Market Share


1.0%


1.3%


2.0%


2.8%


4.4%


7.3%


According to a recent NPD study (link below):

http://www.neowin.net/news/study-many-consumers-still-dont-buy-electronics-online

From the article:

"For example, only 19 percent of people surveyed by NPD said they would be 'extremely' or 'very likely' to buy a new television online, even though 56 percent of them research which TV they want to buy online.

Other products that people are reluctant to buy on a web site include a Blu-Ray player (21 percent), a camcorder (also 21 percent) and oddly enough a mobile phone or smartphone (23 percent). The products with the highest percentage of people willing to pay for them online include computers and computer software (both 34 percent), an eReader (32 percent) and a digital camera (30 percent)."

Although Amazon has grown revenues significantly, it may be difficult to capture more than 20% market share due to the reluctance of many consumers to purchase expensive durables online. For many people there is comfort in testing an item at a store, walking out with their purchase, as well as the value and convenience of customer service when buying and returning.

I project Amazon's market share to slow when it reaches 20% as shown below:



In Millions of $ per year


2011


2012


2013


2014


2015


2016


Amazon US Electronics Segment Projected Revenues


18604


25549


32894


37269


41877


46728


% of revenue from electronics sales


72%


72%


72%


72%


72%


72%


Amazon Electronics Sales


13395


18395


23684


26834


30152


33644


Total US Electronics Market


111622


114971


118420


121973


125632


129401


US Electronics Market Growth Rate


3%


3%


3%


3%


3%


3%


Amazon Market Share


12%


16%


20%


22%


24%


26%


Due to potential from emerging markets and the slow growth of the U.S. electronics market, I project Amazon's international segment to grow revenues faster than the domestic segment. Amazon's international segment's electronics revenues since 2006 and my future projections are below:



Amazon International Electronics and other general merchandise segment


2006


2007


2008


2009


2010


Revenues in Millions of $ per year


1337


2071


3110


4768


7365


Growth Rate


54.9%


50.2%


53.3%


54.5%


My projections:



2011


2012


2013


2014


2015


2016


Revenues


11931


17897


26845


37584


48859


58630


Growth Rate


62%


50%


50%


40%


30%


20%


My total projected revenues for Amazon are as follows, which include "other" segment revenues reaching nearly $5 billion domestically within 5 years, due to growth of Amazon Web Services (AWS):



2011


2012


2013


2014


2015


2016


Amazon Projected Revenues


49944


66497


86305


105052


124072


141908


Growth Rate


46.0%


24.9%


23.0%


17.8%


15.3%


12.6%


Amazon not only faces the challenge of a mature domestic market within its core products but also a challenge improving margins. Amazon's past gross margins are below:



2006


2007


2008


2009


2010


Amazon Net Sales


10711


14835


19166


24509


34204


Growth Rate


38.5%


29.2%


27.9%


39.6%


Cost of Sales


8255


11482


14896


18978


26561


% of Revenue


77.1%


77.4%


77.7%


77.4%


77.7%


Gross Margin


2456


3353


4270


5531


7643


Gross Margin %


22.9%


22.6%


22.3%


22.6%


22.3%


While many companies such as Google (GOOG) and Intel (INTC) have had success increasing gross margins as revenues have grown, Amazon has had trouble doing so. Their gross margin year after year has been remarkably similar. Why? Google and Intel offer products and services which are vitally important and hard to replicate, while Amazon sells commodities and competes mostly on price. Below are gross margins from competitors:



Gross Margin TTM


Best Buy


25.0%


Wal-Mart


25.2%


Barnes and Noble


26.1%


Competitors have remarkably similar gross margins. From Amazon's past execution and the performance of its competitors, it seems unlikely Amazon will be able to improve gross margins much above 25%. Investors are making a mistake by treating Amazon as a unique internet firm. Although Amazon's top line growth needs to be recognized, investors will soon realize Amazon is just another retailer unable to improve gross margins because it is in the business of selling commodities and competing on price.

Below I will examine Amazon's other costs and show why they will also have difficulty increasing their operating margins, which not only has to do with the difficulty of improving gross margins, but also increasing fulfillment, shipping, and technology costs.

A description of fulfillment costs from the most recent 10k:

"Fulfillment costs represent those costs incurred by operating and staffing our fulfillment and customer service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories; picking, packaging, and preparing customer orders for shipment; payment processing and related transaction costs, including costs associated with our guarantee for certain seller transactions; and responding to inquiries from customers. Fulfillment costs also include amounts paid to third parties that assist us in fulfillment and customer service operations."

Fulfillment costs ranged from 8.4%-8.7% of sales from 2006-10. However, in 2011 they have increased to 9.1% of sales. It appears it is costing Amazon more to prepare and process orders. This may not seem like a big deal, as these costs for the first six months of 2011 have only increased 90 basis points compared to the first six months of 2010. But when your operating margins are below 5%, 90 basis points is a big deal.

Net shipping costs are part of "costs of sales." From 2006-09 net shipping costs as a % of revenue ranged from 3%-3.5%. In 2010 they increased to 4.1% of revenue. In 2011, they are up to 4.8% of revenue, an increase of one full percentage point over the first six months of 2010. As Amazon enters the more expensive electronics market and is forced to compete on price, it appears they have no choice but to eat more shipping costs.

A description of Technology and Content expenses from the 10-k:

"Technology and content expenses consists primarily of payroll and related expenses for employees involved in application development, category expansion, editorial content, buying, merchandising selection, and systems support, as well as costs associated with the compute, storage, and telecommunications infrastructure used internally and supporting AWS."

Since 2007, technology and content costs ranged between 5.1% and 5.5% of sales. They have increased to 6.5% of sales the first six months of 2011, a 90 basis point increase from the first six months of 2010. Again, a big deal when operating margins are below 5%. There is no sign of these costs decreasing as a % of revenues, as Amazon states in the latest 10Q, "We expect these trends to continue over time."

The factors above explain why Amazon's operating margin the first six months of 2011 was almost chopped in half compared with the first six months of 2010.

Now that we have an idea of Amazon's future revenue growth and costs, we need to determine the best way to value Amazon.

An EV/EBITDA valuation will not work because Amazon's closest competitors are much slower growth retailers. Currently, Amazon carries a ridiculous EV/EBITDA multiple over 40, nearly 4x e-Bay's multiple.

Free cash flow will also not work because Amazon has been spending aggressively on capital expenditures the past 18 months as they expand rapidly. Shown below:



2010


Q1 and Q2 2011


Net Income


1152


391


Depreciation and Amortization


568


446


Stock-Based Comp


424


254


Excess Tax Benefits from Stock-Based Comp


-259


-61


Capital Expenditures


-979


-731


Free Cash Flow


906


299


Amazon has some work to do if they seek to achieve their ultimate goal stated in the 10k as follows:

"Our financial focus is on long-term, sustainable growth in free cash flow per share."

Both of the above measures would underestimate the value of Amazon. I believe a discounted earnings model is more appropriate, which measures the future earnings power of the underlying business. Below is my discounted earnings model on Amazon. The assumptions are derived from my explanations above. I assume slightly lower tax rates each year due to a greater % of revenue from abroad generated in lower-tax jurisdictions, as well as a slight dilution of share count consistent with the trend due to Amazon's stock compensation. There is no sign of share buybacks in the future. Although Amazon purchased a small amount of shares in 2008, there have been no share repurchases since:



Amazon Discounted Earnings Model


2011


2012


2013


2014


2015


2016


Amazon Projected Net Sales


49944


66497


86305


105052


124072


141908


Growth Rate


46.0%


24.9%


23.0%


17.8%


15.3%


12.6%


Cost of Sales


38457


51203


66455


80890


95536


109270


% of Revenue


77%


77%


77%


77%


77%


77%


Gross Margin


11487


15294


19850


24162


28537


32639


% of Revenue


23%


23%


23%


23%


23%


23%


Fulfillment Costs


4495


5652


7336


8929


10546


12062


% of Revenue


9%


8.5%


8.5%


8.5%


8.5%


8.5%


Marketing Costs


1498


1995


2589


3152


3722


4257


% of Revenue


3%


3%


3%


3%


3%


3%


Technology and Content Costs


3246


3990


5178


6303


7444


8515


% of Revenue


6.5%


6%


6%


6%


6%


6%


General and Administrative Costs


749


997


1295


1576


1861


2129


% of Revenue


1.50%


1.50%


1.50%


1.50%


1.50%


1.50%


Other Costs


200


266


345


420


496


568


% of Revenue


0.40%


0.40%


0.40%


0.40%


0.40%


0.40%


Operating Margin


1299


2394


3107


3782


4467


5109


% of Revenue


2.6%


3.6%


3.6%


3.6%


3.6%


3.6%


Other Income


25


120


155


189


223


255


Earnings before Taxes


1324


2514


3262


3971


4690


5364


Taxes


25%


24%


23%


22%


21%


20%


Net Income


993


1910


2512


3097


3705


4291


Diluted Shares Outstanding


460


469.2


478.6


488.2


497.9


507.9


Earnings per Share


2.16


4.07


5.25


6.34


7.44


8.45


Discounted Earnings per Share


0.53


3.61


4.24


4.65


4.96


5.12


Cost of Capital used


10%


Terminal Growth Rate


5%


Sum of Discounted Earnings


23.12


Discounted Terminal Value


107.58


Amazon Fair Value per Share (after net cash per share adjustment)


139.88


To justify a value of the most recent high near $250 per share, Amazon would have to gain control of 100% of the US books AND electronics markets by 2016! This assumes the same strong revenue growth I projected abroad, and gives you an idea of how challenging it will be for Amazon if they do not begin to focus on cost control. If Amazon is able to increase gross margins to 26% from 23%, a fair value of $250 per share can be justified. While it seems fulfillment, shipping, and technology costs will be higher in the future, as all are geared to remaining competitive and providing better customer service, if Amazon is unable to improve gross margins, the stock price will eventually suffer. With Wal-Mart's gross margin barely above 25%, a firm with perhaps the best ability in terms of "bargaining power with suppliers," it appears unlikely Amazon will be able to improve gross margins to 26%. Given Amazon's long-term performance, gross margins in the 23% range seem more likely.

Now I will turn my attention to Best Buy.

Why on earth would a slow growth, bricks and mortar electronics retailer be appealing as an investment?

While Best Buy is not as liquid as Amazon, the firm remains in solid financial condition. As of the end of May 2011, tangible book value stood at $3.5 billion, cash and equity investments totaled over $2.5 billion, and the firm had virtually no net debt. Like Amazon, Best Buy's financial condition gives the firm the ability to handle a prolonged slow growth economy.

Best Buy's electronics sales and total revenues are not as bad as the recent stock price is reflecting. When domestic electronics sales are examined and broken down in further detail, it is evident larger items such as televisions are suffering much more than smaller items such as tablets.

Below are bricks and mortar electronics and appliance store sales in the US since they peaked in 2007:



US Electronics and Appliance Store Sales (Bricks and Mortar) Source: Department of Commerce


2006


2007


2008


2009


2010


% below peak level


Total Sales


107826


110849


108869


98384


100471


9.4%


Total sales are 9.4% below their peak reached in 2007. A piece of these sales relates to computer and software stores. Although, total electronics and appliance sales are down significantly since they peaked, sales at computer and software stores are 8% above the level reached in 2007. After a trough in 2001 after the technology crash, computer and software sales have grown solidly, were the least sensitive to the Great Recession, and produced the strongest recovery of the electronics/appliance store group. If we strip out computer and software sales and focus solely on appliances and other electronics, we see a market still suffering:



US Electronics and Appliance Store Sales (Bricks and Mortar) ex computer and software


2006


2007


2008


2009


2010


% below peak level


Total Sales


88049


90303


88335


78766


78320


13.3%


If Amazon's sales are added to total electronics and appliance sales, the decline from the peak level reached in 2007 is only 4%, not 9.4%. If Amazon's sales are added and the computer and software store sales are stripped out, electronics and appliance sales are still down 7% from the peak achieved in 2007. This tells me only some of Best Buy's struggle with electronics may have to do with losing market share to Amazon, much of it relates to weak sales of larger durable items such as television and appliances in general. The same can be said for car sales, which remain well below 2007 levels in the United States.

If we examine Best Buy's share of the bricks and mortar market and total market share including Amazon sales, the numbers are not as bad as the stock price is reflecting. Keep in mind that Best Buy's fiscal year ends in late February/early March, so Best Buy's fiscal 2006 revenue in compared with market data from 2005 and so forth:



Best Buy Fiscal Year


2006


2007


2008


2009


2010


2011


Best Buy Total Domestic Sales


27380


31031


33328


35070


37314


37186


Market Share % of Bricks and Mortar


26.99%


28.78%


30.07%


32.21%


37.93%


37.01%


Market Share % including Amazon


26.72%


28.40%


29.47%


31.30%


36.26%


34.31%




2007


2008


2009


2010


2011


% Below Peak


Best Buy Domestic Consumer Electronics Sales


13964


13664


13677


14552


13759


5.5%


We see that Best Buy still retains significantly more market share of the total US electronics markets than they had in 2007. Sales of consumer electronics items specifically are relatively similar to where they were in 2007, while the overall market including Amazon is still down significantly if computer and software store sales are stripped out. Computer and software are reported in Best Buy's home office segment, while consumer electronics consists of items such as televisions. The decline in consumer electronics sales since 2010 is not as bad as it looks. Keep in mind Circuit City virtually shut down in 2009 after they declared bankruptcy. Best Buy was able to take advantage of one of their largest competitors going out of business and gained significant market share in 2010. However, that extra share proved to be unsustainable as newer entrants such as Amazon began to increase their presence after Circuit City's demise.

While Best Buy may not reach market share levels enjoyed in 2010, market share is also not in free fall. Instead of dealing with competitors such as Circuit City, Best Buy must deal with a different competitor in Amazon. There are enough consumers who find comfort in purchasing a large durable such as a television at a store, and when overall sales pick up, Best Buy should benefit.

Based on my projections for the total electronics and appliance market to grow 3% annually the next five years and Amazon to have 26% of the market by the end of 2016, my Best Buy sales projections are below, which assume they retain 37% of the bricks and mortar market:



Best Buy Projected Domestic Revenue


2012


2013


2014


2015


2016


2017


Projected Domestic Revenue


36344


35733


35052


35201


35328


35430


% Share of Bricks and Mortar


37.0%


37.0%


37.0%


37.0%


37.0%


37.0%


% Share of Total Market including Amazon


32.56%


31.08%


29.60%


28.86%


28.12%


27.38%


Projected Bricks and Mortar Market Sales


98227


96575


94736


95139


95480


95756


Projected Electronics/Appliance Market Sales


111622


114971


118420


121973


125632


129401


While areas such as consumer electronics and the entertainment segment have been struggling, Best Buy's home office division has been a bright spot, sparked by sales of tablets and mobile devices, not only domestically but also abroad through the partnership with Carphone Warehouse in Europe. In addition, Best Buy is growing appliance sales abroad by taking advantage of China's emerging middle class. The home office division both domestically and abroad has grown same store sales strongly the past 3 years, as the tablet and mobile markets continue to grow. Same stores sales grew 10.4%, 12.8%, and 3.6% respectively in the domestic home office division in 2009, 2010, and 2011, while sales grew abroad 5% in the home office division in fiscal 2011. Due to Best Buy's focus in China, same store appliance sales grew abroad in fiscal 2010 and 2011, 7.3%, and 15.2% respectively.

Despite meager top line growth, Best Buy is making every effort to add shareholder value. Instead of opening many big box Best Buy stores, which increase capital expenditures substantially, Best Buy is focusing its efforts on growing areas by opening Best Buy mobile locations to take advantage of mobile and tablet demand in the US, as well as expansion of Five Star Stores in China to take advantage of appliance demand in a growing emerging market.

In fiscal 2012, Best Buy plans to open 150 small-format mobile stores within the United States and only 6-8 big Best Buy stores. In years past they opened as many as 100 big Best Buy stores domestically. To take advantage of the Chinese appliance market, Best Buy plans to open 40 to 50 Five Star stores. Substantially fewer openings of big Best Buy stores will reduce capital expenditures remarkably and help free cash flow. Capital expenditures were as much as $1.3 billion in fiscal 2009 but were only $744 million in fiscal 2011 and are on pace to be only $800 million in fiscal 2012. Lower capital expenditures help free up cash to add shareholder value through buybacks and dividends.

Earlier this year, Best Buy authorized a $5 billion share buyback program, which is fairly significant considering their current market cap is only $9 billion. So far this year, Best Buy has reduced share count by 7%. This has potential to substantially increase earnings per share over time. Best Buy also announced a 7% increase of the dividend. At its current price, Best Buy has a 2.64% yield, which is now remarkably more than the current yield of the 10 year Treasury.

In my opinion, Best Buy is making good use of its capital. Share buybacks, dividends, expansion in growing areas, contraction in slower areas, and a focus on controlling costs, have the potential to stop the recent slide in the stock price and provide much better future returns.

Below I will value Best Buy using the same discounted earnings model I used for Amazon. I choose to use discounted earnings instead of free cash flow because I feel a free cash flow model does not capture the effect of future share repurchases.

Because the mobile phone and tablet markets are growing abroad as is appliance demand in China, I project Best Buy's foreign revenue to grow 3% annually. Gartner estimates 1.6 billion mobile phones were sold in 2010 worldwide and sales are on pace to exceed 1.7 billion in 2011. Gartner also estimates global tablet sales will be 63.3 million in 2011 up from 17.6 million in 2010. They estimate sales of over 300 million globally by 2015.

Below is the link to an article showing strong home appliance demand in China, helped by the country's subsidy program:

http://en.21cbh.com/HTML/2011-6-7/yNMjUwXzIxMDMyNw.html

Quote from the article:

"During the first 5 months of the year, a total of 45.23 million units of home appliances worth RMB 109.5 billion under the subsidy program were sold, up 71% and 103% from the same period last year, respectively, according to data released by the Ministry of Commerce on Saturday."

My projections for Best Buy's International Revenues are below:



2012


2013


2014


2015


2016


2017


Best Buy Projected Foreign Revenues


13479


13883


14299


14728


15170


15625


Growth Rate


3%


3%


3%


3%


3%


3%


Below is my discounted earnings model on Best Buy. I assume a 5% reduction in share count per year.



2012


2013


2014


2015


2016


2017


Best Buy Projected Total Revenues


49823


49616


49352


49930


50498


51055


Growth Rate


-0.42%


-0.53%


1.17%


1.14%


1.10%


Cost of Goods Sold


37317


37162


36964


37397


37823


38240


% of Sales


74.9%


74.9%


74.9%


74.9%


74.9%


74.9%


S G & A Domestic


7378


7254


7116


7146


7172


7192


S G & A Foreign


3181


3276


3375


3476


3580


3688


Total S G & A % of Sales


21.2%


21.2%


21.3%


21.3%


21.3%


21.3%


Operating Income


1947


1923


1897


1911


1923


1935


Interest Expense


100


100


100


100


100


100


Earnings Before Tax


1847


1823


1797


1811


1823


1835


Taxes


674


666


656


661


665


670


Tax Rate


36.5%


36.5%


36.5%


36.5%


36.5%


36.5%


Net Income


1173


1158


1141


1150


1158


1165


Minority Interest


50


53


55


58


61


64


Net Income Attributable to Best Buy Shareholders


1123


1105


1086


1092


1097


1101


Diluted Shares Outstanding


381.40


362.33


344.21


327.00


310.65


295.12


Earnings Per Share


2.94


3.05


3.15


3.34


3.53


3.73


Discounted Earnings


1.18


2.70


2.56


2.49


2.41


2.34


Cost of Capital used


9%


Terminal Growth Rate


1%


Discounted Earnings


13.69


Discounted Terminal Value


29.54


Best Buy Fair Value per Share(after adjustment for cash and securities/debt/minority interest)


42.30


Based on thorough analysis, I feel Best Buy provides significant upside potential and a margin of safety at its current price, while Amazon's growth is already priced in. Only time will tell if I am correct, but I am willing to give this investment thesis 3-5 years to play out.

About the author:


Rating: 4.5/5 (41 votes)

Comments

darps
Darps - 5 years ago    Report SPAM


You are projecting Best Buys net income to be about the same or slightly less in 2017 as in 2012.

So, if one doesn't do the fancy math (Discounted cash/ earnings flow) and just assigns a multiple one is willing to pay for a flat income stream

probably 10-12 times earning, one gets an enterprise value of $11B-$13B. Compared to its share price it is probably 20-40% undervalued.

However, if revenue growth is flattish or about 1% that you are projecting for the next 5 years, I have doubts the net income would be able

to be maintained at that flattish level. If thats the case then Best Buy is just slightly undervalued or probably fairly valued.
Matt Blecker
Matt Blecker - 5 years ago    Report SPAM
Darps,

You would be correct if Best Buy were not returning money to shareholders through buybacks.

Today many investors are short-sighted and focus on the short-term fluctuation of Best Buy stock. They feel share buybacks have not been a good deal because Best Buy's average purchase price is higher than the current stock price. But they miss the fact that share buybacks may increase the earnings power of the business. Despite flat revenues, Best Buy is worth more than the current earnings divided by the cost of capital because their earnings power has potential to grow because of share buybacks.

And if Amazon is not able to capture the market share I projected above or if revenues grow abroad more than I anticipate, Best Buy might be able to grow earnings even without the effect of share buybacks.
clsizemore
Clsizemore premium member - 5 years ago
Matt, you are anything if not thorough. Good article.

CLS
aronriber
Aronriber - 5 years ago    Report SPAM
Amazon doesn´t need to improve their margin. Improving revenues is easy for them and that is enough.
Matt Blecker
Matt Blecker - 5 years ago    Report SPAM
Not true. Please explain in detail how you arrive at that conclusion. I just showed growing revenues to nearly $150 billion within five years, an incredible growth rate, does not justify the current stock price.

I repeat: At these margins, Amazon would have to capture 100% of the US books and electronics markets to justify a fair value of the most recent high near $250.

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