Best Buy Co Inc (BBY, Financial) recently reported a daily gain of 5.25% and a 3-month gain of 0.85%, with an Earnings Per Share (EPS) (EPS) of 5.91. This performance has led to questions about whether the stock is modestly undervalued. In this article, we delve into a comprehensive valuation analysis of Best Buy Co to answer this question.
Company Introduction
Best Buy Co, the largest pure-play consumer electronics retailer in the U.S., reported consolidated sales of $46.3 billion in fiscal 2023. With a market share of roughly 8.5% in the U.S. and over 35% in offline sales, the company's business is primarily in-store, focusing on mobile phones, tablets, computers, and appliances. Despite the COVID-19 pandemic, recent investments in e-commerce fulfillment have seen the U.S. e-commerce channel double, with management estimating it will represent a mid-30% proportion of sales moving forward. The current stock price is $77.96, and the GF Value is $102.79, suggesting that the stock might be modestly undervalued.
Understanding the GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It's calculated based on historical multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at.
According to our valuation method, Best Buy Co (BBY, Financial) appears to be modestly undervalued. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns.
Given that Best Buy Co is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength of Best Buy Co
It's always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength can lead to a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Best Buy Co has a cash-to-debt ratio of 0.26, which is worse than 63.32% of 1096 companies in the Retail - Cyclical industry. The overall financial strength of Best Buy Co is 7 out of 10, which indicates that the financial strength of Best Buy Co is fair.
Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Best Buy Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $45.10 billion and Earnings Per Share (EPS) of $5.91. Its operating margin is 3.95%, which ranks better than 52.74% of 1096 companies in the Retail - Cyclical industry. Overall, the profitability of Best Buy Co is ranked 8 out of 10, which indicates strong profitability.
Growth is probably one of the most important factors in the valuation of a company. If a company's business is growing, it usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Best Buy Co's 3-year average revenue growth rate is better than 63.8% of 1047 companies in the Retail - Cyclical industry. Best Buy Co's 3-year average EBITDA growth rate is 4.3%, which ranks worse than 58.71% of 901 companies in the Retail - Cyclical industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Best Buy Co's return on invested capital is 15.14, and its cost of capital is 8.81.
Conclusion
Overall, Best Buy Co (BBY, Financial) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 58.71% of 901 companies in the Retail - Cyclical industry. To learn more about Best Buy Co stock, you can check out its 30-Year Financials here.
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