Best Buy (BBY, Financial), which is the world’s largest multi-channel consumer electronics retailer with stores in the US, Canada, China and Mexico, reported a strong set of numbers for the third quarter of 2015 and the stock is a good buy and hold after the results. This article discusses the results and the reasons to hold on to the company’s stock for the next 2 quarters.
Looking at the results first, Best Buy reported revenue of $9,380 million as of 3Q15 as compared to revenue of $9,327 as of 3Q14. While the company’s revenue remained largely flat on a y-o-y basis, the biggest positive for Best Buy was an expansion in the company’s margins and its impact on the EPS.
The company reported an EPS of $0.32 per share in 3Q15 as compared to an EPS of $0.18 per share in 3Q14. The company’s SG&A cost reduction initiatives have paid off with strong growth in EPS and I believe that this EPS turnaround for Best Buy will continue in the foreseeable future.
Another positive factor for Best Buy in the results was an increase in comparable store sales growth. While the comparable store sales growth was just 0.3% in 3Q14, the comparable store sales growth surged to 2.2% in 3Q15.
With strong results, Best Buy also announced a dividend of $0.19 per share and this implies an annual dividend of $0.76 per share. At a current stock price of $38.9, Best Buy is therefore offering a healthy dividend yield of 2%.
I believe that another important reason for considering Best Buy is the company’s forward valuation. The stock is trading at a forward (February 2016) PE of 14.68 and this looks attractive considering the earnings growth the company has registered. Best Buy is also trading at a forward (5-year) PEG of 0.91 and this implies that the company is undervalued. I therefore expect the stock to move higher over the next 2 quarters.
In the last three months, Best Buy has surged by 21.6% and I believe that the stock upside will continue at least for the next two quarters. The company’s forward valuation (as discussed above) backs my point on a continued stock upside.
I want to mention here that Best Buy has already said that the company’s margin could face some pressure in the fourth quarter even when the outlook for sales growth is strong. This should not be a matter of concern for shareholders as the lower margin can potentially be due to an increase in lower margin business, investments in customer facing initiatives and higher growth in the company’s lower margin online channel.
I believe that the management is being conservative and even with this outlook, the stock is moving higher. Some of the investments like investment in customer facing initiatives can bring long-term positives even if the near-term margins are impacted.
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