A few years ago, the consensus was that Best Buy (BBY) was going to go the way of Borders and become another trophy on Jeff Bezos’ mantle. The company was mockingly referred to as Amazon’s storefront, as people would go to stores, figure out what to buy, and then order it online.
New management came in and solved this problem by agreeing to match any online price and improving its in-store shopping experience. Then, it invested heavily into its eCommerce marketplace which functions similarly to AMZN’s marketplace by selling directly to customers but also letting other third-parties sell on the platform. This transformed BBY from a struggling retailer into a financially, sound company seeing an acceleration in sales and earnings.
Today, I want to talk about what makes BBY so attractive from a value and growth perspective. Then, we’ll dig into the moves that BBY is making to position itself for continued success in the post-coronavirus economy.
Management’s changes put BBY on the right trajectory… and then, the coronavirus accelerated this trajectory. People needed to upgrade their technology since they were working from home or taking classes online. At the same time, customers’ pockets were flush due to stimulus payments, and less spending in other areas.
Looking ahead, BBY is set to outperform. More stimulus payments translate into people buying more TVs, phones, etc. A strong housing market means more sales of high-ticket items like washers, dryers, and refrigerators. And, when the economy “normalizes”, there will be pent-up demand to shop at physical retail stores.
For BBY, solving the “Amazon problem” also triggered an impressive run of beating earnings. It’s topped estimates 19 out of the last 20 times it reported. This gives confidence as it approaches its next earnings release. Equally important, it demonstrates that BBY’s management is capable of meeting challenges and achieving its goals.
Another indication of management’s savvy is its rapid adoption to the coronavirus economy by taking steps such as quickly initiating curbside pickups at all of its stores. Previous investments in logistics and its supply chain also enabled it to meet the demand for laptops and PCs when other companies struggled.
As a result, analyst expectations for 2021 earnings have increased from $4.20 to $7.70 over the past year. Last quarter, it topped earnings by a juicy 21%. The company also has several strategies to continue growth such as building smaller stores in densely populated areas that sell popular items and serve as a pickup point for online orders.
Additionally, the company’s services side of the business – GeekSquad and in-Home Advisors – also presents an opportunity in fixing technical problems and giving customers advice on choosing the best products and setting up their equipment. Both divisions are higher-margin businesses and have significant upside as the company wants to expand these offerings to a wider group of customers including small businesses.
Value is in short supply in this market as it pounds out new high after new high. However, Best Buy lives up to its name by offering great value as well. For example, BBY sports a forward PE of only 14.3, while the S&P 500 has a forward P/E of 22.
Analysts are bullish on the stock as it has a consensus price target of $127 which gives it about 18% upside from current levels. Note thhttps://www.tipranks.com/analysts/matthew-mcclintockat there are many analysts with targets of $130+ including top ranked analyst, Matthew McClintock of Raymond James, who sees the stock reaching $150.
BBY has an overall rating of B which equates to a Buy in our POWR Ratings system. These stocks have enjoyed performance about 2.5X better than the S&P 500 over the last 21 years.
The POWR Ratings also evaluates stocks by various components such as Value, Momentum, and Quality. In fact, the Value grade is determined by looking at 31 different factors. It’s not surprising that BBY is a B given its low P/E and P/S ratios especially compared to the market’s average.
Usually, there’s a tradeoff between Value and Momentum, however, BBY has a Momentum grade of an A. This is consistent with the stock’s healthy outperformance over the past 6 to 12 months.
Given our earlier discussion of BBY’s strong management team and adept handling of challenges, it’s not surprising that it has a Quality rating of B. This comes from looking at over 30 fundamental factors that show the operational strength of the firm.
All in all the POWR Ratings system reviews BBY from 8 different dimensions and we only shared half of those above. So if you want to know how it scores for Growth, Stability, Sentiment, and Industry Grade, then get all the BBY ratings here.
Putting It All Together
BBY was successful before the Coronavirus…during the Coronavirus…and most every sign points to it excelling in the months and years ahead. On top of the impressive growth prospects and attractive value proposition, it also pays an above average 2% dividend yield. When you add it all up you understand why this is a worth Stock of the Week selection.
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BBY shares . Year-to-date, BBY has gained 7.92%, versus a 0.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
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