Best Buy is the largest consumer electronics retailer in the U.S., with about 20% of the $170 billion market. With its 2009 acquisitions, the firm increased its share of the $700 billion global consumer electronics market to roughly 6%. Best Buy also operates under the Future Shop and Five Star trade names in Canada and China. They operate over 2400 Best Buy Europe stores as well as Magnolia Home Theater, Pacific Sales Kitchen and Bath, and Geek Squad here in the U.S.
The bankruptcy of rival Circuit City has allowed Best buy to increase its already market- leading share of the US space. FY 2010 [ends Feb. 28, 2010] will show the highest revenues ever at an estimated $49 billion. December 2009 sales were up 13% year-over-year.
Here are BBY’s impressive (split-adjusted) per share numbers from continuing operations as reported by Value Line:
* FY 2010 includes consensus estimates for Q4
Zacks now sees FY 2011 coming in at $3.33 /share making BBY’s multiple about 11.5x trailing and 10.7x forward earnings estimates. That’s the lowest valuation for BBY since the lows of 2000 and 2002. Buyers of Best Buy at those times saw the shares rebound from $9.30 to $35.80 (from December 2000 to March 2002) and from $11.30 to $59.50 (from November 2002 to April of 2006).
Just a quick glance at the chart above will show that both sales and earnings have surged over the past decade while the P/E has compressed. BBY’s valuation has rarely been this compelling despite the fact that fundamentals are expected to be at all-time highs in the fiscal year starting March 1st.
Dividends were initiated in calendar year 2003 and have been steadily increased to today’s $0.14 quarterly rate. At today’s close that provides a well-covered current yield of 1.57%.
Best Buy receives an ‘A’ for financial strength from Value Line and also scores high with 80th and 90th percentile ranking in ‘stock price growth persistence’ and ‘earnings predictability’ (with 100th being best).
I see no reason that these shares can’t command at least a 14 multiple again at some point over the next two years. That leads me to a 12 – 15 month target price of about $45 - $50. Is that an attainable goal? I think so. BBY shares actually changed hands above $45 in calendar years 2005-2006-2007-2008 and 2009. Standard and Poors calls ‘fair value’ as $46 while Morningstar comes in at a $45 /share fair value estimate.
A rebound to even $45 would bring a total return of about 28% from today’s closing quote while not even nearing the old highs set when sales, dividends and earnings were far lower than they are now.
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If you’re option savvy you can play Best Buy as a buy/write combination to achieve outstanding potential gains while giving yourself a reasonable margin of safety from today’s price.
Consider this not quite two –year play…
If BBY shares rise to at least $40 (+ 12.4% or better) by the Jan. 2012 expiration date:
· The $40 calls will be exercised.
· You will sell your shares for $40,000.
· The $40 puts will expire worthless.
· You will have collected at least $1,120 in dividends.
· You will have no further option obligations.
· You will end up with no shares and $41,120 in cash.
This best-case scenario result would be a net profit of $19,030/$22,090 = + 86% cash-on-cash, achieved in less than 23.5 months on shares that only needed to move up by 12.4% from the trade’s inception price.
What’s the risk?
If BBY shares remain
· The $40 calls will expire worthless.
· The $40 puts will be exercised.
· You will be forced to buy an additional 1000 BBY shares.
· You will need to lay out another $40,000 in cash.
· You will have collected at least $1,120 in dividends.
· You will have no further option obligations.
· You will end up with 2000 BBY shares and $1,120 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $35.59 /share purchase price less the $4.40 /share call premium = $31.19 /share (excluding dividends).
On the ‘put’ shares it’s the $40 strike price less the $9.10 put premium = $30.90 /share.
Your overall break-even would be $31.05 /share excluding yield and $30.77 adjusted for dividends. BBY shares could drop as much as 13.5% without causing a loss on this trade.
Summary:
Best Buy appears to be a high-quality, medium yielding stock that offers at least 25% - 30% total returns over the next year or so. Buying BBY shares while simultaneously selling $40 strike-price LEAP puts and calls for 2012 would allow for any gains of more than 12.5% to translate into 86% cash-on-cash returns.
Disclosure: Author is long BBY shares and short BBY options.
The bankruptcy of rival Circuit City has allowed Best buy to increase its already market- leading share of the US space. FY 2010 [ends Feb. 28, 2010] will show the highest revenues ever at an estimated $49 billion. December 2009 sales were up 13% year-over-year.
Here are BBY’s impressive (split-adjusted) per share numbers from continuing operations as reported by Value Line:
FY | Sales | C/F | EPS | Div. | B/V | Avg. P/E | 52-wk. Range |
2001 | 32.73 | 1.20 | 0.83 | Nil | 3.89 | 31.0x | 9.30 – 39.50 |
2002 | 40.94 | 1.79 | 1.18 | Nil | 5.27 | 22.6x | 12.40 – 33.40 |
2003 | 43.37 | 1.93 | 1.27 | Nil | 5.65 | 17.1x | 11.30 – 35.80 |
2004 | 50.41 | 2.43 | 1.63 | 0.27 | 7.03 | 18.8x | 15.80 – 41.80 |
2005 | 55.70 | 2.82 | 1.91 | 0.27 | 9.03 | 18.6x | 29.20 – 41.50 |
2006 | 63.59 | 3.29 | 2.27 | 0.31 | 10.84 | 19.2x | 31.90 – 53.20 |
2007 | 74.76 | 3.92 | 2.79 | 0.36 | 12.90 | 18.6x | 43.30 – 59.50 |
2008 | 97.48 | 4.84 | 3.12 | 0.46 | 10.92 | 15.1x | 41.80 – 53.90 |
2009 | 108.82 | 4.84 | 2.88 | 0.53 | 11.22 | 12.4x | 16.40 – 53.00 |
2010* | 115.30 | 5.15 | 3.10 | 0.56 | 14.38 | 12.1x | 23.97 - 45.55 |
* FY 2010 includes consensus estimates for Q4
Zacks now sees FY 2011 coming in at $3.33 /share making BBY’s multiple about 11.5x trailing and 10.7x forward earnings estimates. That’s the lowest valuation for BBY since the lows of 2000 and 2002. Buyers of Best Buy at those times saw the shares rebound from $9.30 to $35.80 (from December 2000 to March 2002) and from $11.30 to $59.50 (from November 2002 to April of 2006).
Just a quick glance at the chart above will show that both sales and earnings have surged over the past decade while the P/E has compressed. BBY’s valuation has rarely been this compelling despite the fact that fundamentals are expected to be at all-time highs in the fiscal year starting March 1st.
Dividends were initiated in calendar year 2003 and have been steadily increased to today’s $0.14 quarterly rate. At today’s close that provides a well-covered current yield of 1.57%.
Best Buy receives an ‘A’ for financial strength from Value Line and also scores high with 80th and 90th percentile ranking in ‘stock price growth persistence’ and ‘earnings predictability’ (with 100th being best).
I see no reason that these shares can’t command at least a 14 multiple again at some point over the next two years. That leads me to a 12 – 15 month target price of about $45 - $50. Is that an attainable goal? I think so. BBY shares actually changed hands above $45 in calendar years 2005-2006-2007-2008 and 2009. Standard and Poors calls ‘fair value’ as $46 while Morningstar comes in at a $45 /share fair value estimate.
A rebound to even $45 would bring a total return of about 28% from today’s closing quote while not even nearing the old highs set when sales, dividends and earnings were far lower than they are now.
*******************************************************************************************
If you’re option savvy you can play Best Buy as a buy/write combination to achieve outstanding potential gains while giving yourself a reasonable margin of safety from today’s price.
Consider this not quite two –year play…
Cash Outlay | Cash Inflow | |
Buy 1000 BBY @ $35.59/share | $35,590 | |
Sell 10 Jan. 2012 $40 calls @ $4.40 /share | $4,400 | |
Sell 10 Jan. 2012 $40 puts @ $9.10 /share | $9,100 | |
Net Cash Out-of-Pocket | $22,090 |
If BBY shares rise to at least $40 (+ 12.4% or better) by the Jan. 2012 expiration date:
· The $40 calls will be exercised.
· You will sell your shares for $40,000.
· The $40 puts will expire worthless.
· You will have collected at least $1,120 in dividends.
· You will have no further option obligations.
· You will end up with no shares and $41,120 in cash.
This best-case scenario result would be a net profit of $19,030/$22,090 = + 86% cash-on-cash, achieved in less than 23.5 months on shares that only needed to move up by 12.4% from the trade’s inception price.
What’s the risk?
If BBY shares remain
· The $40 calls will expire worthless.
· The $40 puts will be exercised.
· You will be forced to buy an additional 1000 BBY shares.
· You will need to lay out another $40,000 in cash.
· You will have collected at least $1,120 in dividends.
· You will have no further option obligations.
· You will end up with 2000 BBY shares and $1,120 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $35.59 /share purchase price less the $4.40 /share call premium = $31.19 /share (excluding dividends).
On the ‘put’ shares it’s the $40 strike price less the $9.10 put premium = $30.90 /share.
Your overall break-even would be $31.05 /share excluding yield and $30.77 adjusted for dividends. BBY shares could drop as much as 13.5% without causing a loss on this trade.
Summary:
Best Buy appears to be a high-quality, medium yielding stock that offers at least 25% - 30% total returns over the next year or so. Buying BBY shares while simultaneously selling $40 strike-price LEAP puts and calls for 2012 would allow for any gains of more than 12.5% to translate into 86% cash-on-cash returns.
Disclosure: Author is long BBY shares and short BBY options.
