Use access key #2 to skip to page content.

Better Know a Stock - Part 21

Recs

26

March 30, 2011 – Comments (4) | RELATED TICKERS: BBY , RSH , HGG

The inspiration here is all Stephen Colbert's.... he has his series of "Better know a district" so I figured why the heck not... Better Know a Stock, companies that are never followed or too small to be heard of. So here goes that 9000 part series.... =)

Best Buy (NYSE: BBY)

Sure I can make your life really easy and direct you to the comments I've made already on Best Buy, but I plan to go even more in depth.

Just in case you were curious though, here's that article: http://www.fool.com/investing/general/2011/03/25/2-value-plays-you-need-on-your-watchlist.aspx

So long story short, we know that Best Buy reported a dismal quarter if you take into account television sales and a majority of other electronic components. Part problems stemming from the massive earthquake in Japan may also impede television and other electronic sales into the foreseeable future. And still... things are nowhere near as bad as investors are making them out to be.

Best Buy is the largest electronics retailer in the US and it's not like the company is magically going to wake up one day in the bankruptcy line. Best Buy could go stagnant in the revenue department and it would STILL bring in somewhere in the neighborhood of $1.9-$2.0 billion in cash flow each year. It could render its 2% plus dividend null and void and really go gangbusters with its cash, but its not going to do that.

Best Buy instead is going to get leaner and meaner by opening smaller locations and focusing on higher margin products. Who knew the secret to success in retailing was to focus on higher margin products? (Uh doy!) Tablets and smartphones will be the key drivers to Best Buy's business plan going forward and for the love of God will someone please tell them to abandon all hope on 3-D televisions - they are a fad.

Best Buy is going to continue to face stiff competition from online retailers Amazon.com and Wal-Mart, but lo-and-behold, the company is finally going to step up and do something about it. It detailed plans to greatly expand its online presence to counter consumers' insatiable need to scour the internet before they do their in-store shopping. Who knew that people actually used this thing called the internet?

Again, the quarterly report wasn't awe-inspiring, but it wasn't as bad as investors are making it out to be. Really the only thing Best Buy has to do is curtail its stale image with investors and it'll be fine. The company is going to continue to plug along with 3-5% revenue growth each year as long as it sticks to its new gameplan, and its trading at a ridiculous, and I mean ridiculous 7.7 times forward earnings which is insane given that its under 6 times its trailing twelve month operating cash flow.

It's not like Best Buy has any real competition to speak of either that's going to challenge it for dominance. hhgregg isn't a bad company by any means, but financially it's going to struggle even more thanks to its high dependence on television sales. We've seen that over the past two quarters as the company has slumped badly and taken down forward guidance a number of times. And seriously, does anyone think RadioShack has a hope in hell of actually making a dent into Best Buy's share of the tablet sales market? If I'm purchasing a tablet I'd consider Best Buy a long time before I'd consider going to a RadioShack.

On a side note and as a complete tangent... RadioShack isn't as horrible a company as I once thought, but its name is so ridiculously stale that no self-respecting investor can afford to tie his/her money up in the company. If RadioShack wants to help its investors out, it needs to consider a name change and update its image.

From a technical perspective I admit that I haven't taken a position in Best Buy yet. That trainwreck of a chart is one of the reasons I've bit my tongue and remained on the sidelines as things have played out. I still feel the overall market is ripe for a cooling off phase and that would provide Best Buy the perfect opportunity to decisively break lower and into my potential buy range. Now what does this mean? It means I may be looking to purchase Best Buy around $24 but that's no guarantee that I'll actually do it. In fact things could drastically change at that point and I may not support the position altogether then. I.e. please consider doing your own research and consider this simply my opinion of what I'm looking at right now. But I do have to say based on a pure fundamental perspective, Best Buy is as attractive a buy as I can remember it in the 12 years I've followed the stock. I know where my buy price is, now I just have to sit on my hands and wait to see if the stock comes to me...remember, I don't chase stocks higher.

Those numbers don't lie, and that ain't no bull!

Disclosures: No material interest or ownership in any stocks mentioned in this article including BBY, AMZN, WMT, RSH and HGG nor any intention to enter into a position in any of these stocks over the next 72 hours.

TMFUltraLong

4 Comments – Post Your Own

#1) On March 30, 2011 at 4:09 AM, ryanalexanderson (< 20) wrote:

Agreed on the name change. All the Radio Shacks in Canada were bought out by another retailer in 2004, and the first thing they did was drop the branding and licensing agreement and rename the stores to "The Source".

 

Report this comment
#2) On March 31, 2011 at 12:59 AM, walt373 (99.83) wrote:

RadioShack is even cheaper than Best Buy and buying back stock hand over fist. I would say Best Buy is the higher quality company but at the same time, RadioShack has suprisingly high and consistent profitability.

Report this comment
#3) On March 31, 2011 at 1:12 AM, TMFUltraLong (99.95) wrote:

Walt373,

But what does RadioShack have to bring to the table. Its business is as stale as three week old bread left sitting on the counter. People go to RadioShack for a $5 part, not a large TV or even a tablet computer. The execs at RadioShack have to do SOMETHING just to get investors even remotely excited about its business prospects and share buybacks are really about it. The company really really really needs to re-invent its image altogether and consider a name change. Best Buy looks like the clear buy to me.

TMFUltraLong

Report this comment
#4) On March 31, 2011 at 11:17 AM, walt373 (99.83) wrote:

The widely-held "stale" image is not important if they are making money, which they are doing. Look at their financials for the past 10 years. Revenues are flat to increasing, they are profitable every year, and doing it with ROE of 20-30%.

A large part of their business is selling cell phones now. They just announced they are selling the iPad 2. There is a good writeup at Whopper Investing that gives a good idea about the business. I am not long the stock btw but I think it makes sense to consider it if you like BBY too.

Report this comment

Featured Broker Partners


Advertisement