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Since Circuit City collapsed late last year, the conventional wisdom has viewed this as a boon to Best Buy (NYSE:BBY). In all likelihood, this is the case as the two were in direct competition for consumer electronics retail dollars. However, the market has already priced in quite a bit of this market share grab, as the stock is up more than 30% since Circuit City shut its doors for good on March 8th. In addition to the more than 30% gain in just over two weeks, analysts have become more positive on BBY in the last few weeks. According to Yahoo Finance, in the last 30 days 10 of the 22 analysts have raised earnings expectations in the past 30 days versus just one who has lowered projections. Monday’s Power Lunch on CNBC had this to say,

“A number of analysts called interesting one on Best Buy. Goldman Sachs upping Best Buy’s price target to $35 based on higher sales expectations. Goldman sees improving sales and suggests tight TV supplies.”Ockham historical valuation BBY

This is all well and good, but analysts have been talking about how consumer spending has taken a huge hit in this downturn. Remember, Thursday’s fourth quarter results include the horrid holiday shopping season last year as well. If I were a Best Buy investor, I would be a little be on edge with expectations this high. Who knows, Best Buy might hit the ball out of the park, but it seems like that is precisely what the market is expecting. However, if there is a disappointment and earnings come in below consensus EPS estimates of $1.40 then the stock might give a chunk of that recent 30% gain right back.

Considering Best Buy management has given an outlook that anticipates same-store sales declines in the range of 2 to 3 percent. Furthermore, they offered early retirement packages to 4000 salaried employees in order to cope with the “most challenging consumer environment” in the company’s history. It seems to us, that Best Buy has been trying to ratchet down expectations, but is anyone listening?

It is a less than optimal situation for BBY shareholders to be in, because if it exceeds numbers, everyone will have expected it as their largest competitor has departed the industry. However, if they fall short in earnings or revenue projections the stock will take a hit. Especially tough position to be in as sales have been pretty rough for computers and luxury items in the last few months. As for the Ockham valuation, based primarily on price-to-sales and price-to-cash flow trends, Best Buy is Fairly Valued in our methodology.

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Source: Expectations Too High for Best Buy?