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Bavneet Singh Nagpal
Bavneet Singh Nagpal
Articles (43) 

Valuing Best Buy for Potential Catalyst

Company has upside potential of 30%

Best Buy (NYSE:BBY) is the largest specialty retailer of consumer electronics in the U.S. As of February, it had 1,037 stores in the U.S., whereas the number of international Best Buy stores stood around 216 with 350 stand-alone Best Buy mobile stores in the U.S. that focus on mobile phones and accessories. Currently the stock is trading at a P/E multiple of 10.30 while comparing it with peers, and it has an upside potential of 30% from the market price of $30.06.

Company overview

Best Buy sells a variety of brands of electronic devices such as TVs, home theater systems, cameras, appliances, computers, mobile phones, video games, software and repair and installation services to consumers across the country under different store brands. It operates a click-and-mortar strategy wherein it uses online channels as an effective way to boost store sales and allocates any sales made online to its stores. Best Buy competes primarily with retailers such as Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), Target (NYSE:TGT) and Costco (NASDAQ:COST). Overall the stock has performed well on a year-to-date basis in comparison to Costco and Target.

Management profile

Recent news published at GuruFocus revealed that Hubert Joly, chairman and CEO, sold some shares on June 2 at a price of $32.24. This will lead to a decrease in the price of the stock by negative 6.02%. Below we have analyzed and found some of the factors that still reveal there is potential in this company that will take the price above the recent level of $30.06.

Best Buy’s catalyst

Ecommerce platform share rose to 23.9%

Best Buy is working hard to be competitive in the online market. Best Buy has been working toward growing its share of ecommerce, and it is visible after its first-quarter earnings report, which revealed that there is an increase of 18.6% share in comparison to the previous year same quarter in its ecommerce platform revenue. Best Buy reported better-than-expected revenue and EPS that increased to 69 cents compared to 10 cents last year same quarter.

Launch of new iPhone

A recent survey reported that 60% of people haven’t upgraded from iPhone 6 to iPhone 6s. That means most people haven’t upgraded since 2014 and will definitely look for a change when Apple releases its iPhone 7. Best Buy has Apple stores within stores at many of its locations so Best Buy should be a natural beneficiary of strong iPhone sales later this year; we have projected a bit higher earning to $870 million for the fiscal year 2016.

Modifications in stores

Considering the fact that every year Best Buy has been turning out some of its stores we estimated that there would be around 1,600 stores by the end of 2017.

Best Buy currently trades at lower to its peers, given its higher-than-peer growth profile. It deserves to trade at a target P/E multiple of greater than 10.30 multiple, compared to its peers. This suggests a 30% upside to its price of U.S. $30.06. A DCF-based valuation yields an intrinsic value of $39.07.

Jim Simons is the company's leading shareholder among the gurus with 0.73% of shares outstanding followed by Joel Greenblatt (Trades, Portfolio) with 0.27% and Hotchkis & Wiley with 0.25%.

Note: The above image of stock performance is taken from Yahoo! (NASDAQ:YHOO) Finance. Image representing hedge postion is taken from GuruFocus data.

Disclosure: While writing this article I didn't hold any position in the above mentioned stock, nor do I have any plans to invest in the organization for the next 72 hours.

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