Less Buying at Best Buy (BBY)

Best Buy (BBY) reported first quarter results that easily topped analysts profit estimates in a difficult time, but the fact that comparable sales slid is putting some hopes of consumer driven “green shoots” to the test. Best Buy is without a doubt a bellwether for electronics and retailers in general, and the results have more than a few investors skeptical that the consumer spending environment is improving right now. The good news is that first quarter EPS was $.42 versus consensus estimates of $.34, even though revenue fell just shy of the $10.13 billion analysts had hoped for. Margins have improved and Best Buy has gained market share since the departure of its primary competitor Circuit City. The market has been disappointed that there was not more positive impact from the fall of Circuit City as same store sales were down 6.2% and in store traffic struggled. Shares are trading down about 5% or $2 in early trading action on heavily volume.

This does not come as a huge surprise because we are seeing data that consumers, at least for the time being, are changing their behavior. Savings rates are at 15 year highs as consumers are seeing the wisdom in keeping a monetary cushion for any future rainy days. Gasoline prices have rising persistently over the last two months and as everyone knows this puts a strain on purchasing power. At the same time, other consumers are stretched to the max already and cannot spend anymore, as credit card defaults reached a record high in May. All of these trends spell trouble for the leader in consumer electronics. Although, it is at least surprising that the market has hit Best Buy so hard after beating the analysts predictions.

“Best Buy’s biggest competitor disappeared, its margins improved, but The Street wanted to see a much bigger benefit from the liquidation of Circuit City and that was the main focus this morning. Best Buy gained 2% of the electronics market from the disappearance of Circuit City. Its earnings did beat street forecast by 5 or 6 cents when you add in restructuring charges. Here’s the problem. Best Buy now owns a bigger piece of a shrinking electronics market. Because traffic dropped, sales declined more than 6% here and mobile phones and computers are the new bright spot.” CNBC’s The Call 6/16/2009

As you can see in the quote from CNBC, mobile phones and computers are the highlights in Best Buy’s sales report. It seems reasonable that consumers are only buying what will provide them with the most utility meaning DVD/Blu-ray movies, CD’s, video games, etc could continue to be a weak point. At present, Ockham has placed a Fairly Valued valuation on Best Buy because the price coming into the day seemed reasonable give historical price-to-sales and price-to-cash earnings ranges. With the sell off today, shares are starting to get near the price that we think will make it more attractive to value investors. Even in the difficult sales environment, we expect for Best Buy to reap the benefits of Circuit City’s demise as holiday shoppers hit the stores. If Best Buy stock continues to decline through the rest of the week, it will very likely be an upgrade candidate next week.

Less Buying at Best Buy

About Ockham Research 645 Articles

Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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