Your Earnings Season Preview: Best Buy

Mar.26.13 | About: Best Buy (BBY)

Past Performance: Best Buy (NYSE:BBY) has been a broken stock for the past couple of years, with a troubling amount of liability on the balance sheet due to long term leases on massive stores. To make matters worse, analysts have called Best Buy the "showroom" for consumers who shop on Amazon. Over the past four years Best Buy has beaten EPS estimates five times and missed EPS estimates three times. Two of those EPS misses came last year in quarters two and three, with quarter four EPS beating estimates.

The stock itself has fallen from a five year high on April 19, 2010 of $48.58 to a five year low of $11.29 on December 28, 2012. Since hitting that five year low, the stock has rebounded to current levels around $21 per share. Best Buy has support at $18 per share without further support until the $16.20 level, and has just recently broken through the resistance level at $21.10 per share.

Fundamentals: Best Buy has no current P/E, a Forward P/E of 9.4, a P/S of 0.16, and a PEG of -3.13. Compare that to the consumer services sector and the S&P 500. The consumer services sector trades with a P/E of 21.3 and a Forward P/E of 25.5. Meanwhile, the S&P 500 trades with a P/E of 20.5 and a Forward P/E of 17.7.

Using those metrics, Best Buy looks to be grossly undervalued strictly from a fundamental analysis standpoint. If you look at the business model, which Wall Street is, it is easy to see that BBY needs to expedite the turnaround. Amazon (NASDAQ:AMZN) doesn't have the overhead of the massive storefronts, the employees required to run those facilities, or the expense associated with the distribution to those stores. However, Best Buy just announced in early March that they will be extending their price matching policy to eliminate the "show-rooming" effect online retailers have been using for years against the electronics giant.

The Story: Best Buy is another turnaround play. They still have a long way to go to keep up with the likes of online retailers such as Amazon and Ebay (NASDAQ:EBAY). Online shopping has increased exponentially over the years, and Best Buy has struggled to adapt. Then, Best Buy still has the giant "catch-all" retailer Walmart (NYSE:WMT) to contend with on lower end product offerings.

The competition is very stiff for Best Buy to continue to take hits as they attempt to marry the idea of physical locations as well as online retail services. Also, take into account the macro economic factors. If the Federal Reserve were to raise interest rates, it would help Best Buy. With increased interest rates comes more lending from banks, more business expansion from lending, and lower unemployment from business expansion. Lower unemployment means more disposable income for consumers. More disposable income means more impulse buys, big ticket purchases, and more sales in general for Best Buy. All it takes is a simple interest rate increase from the Federal Reserve for Best Buy to increase sales, as Best Buy moves to increase online sales as well.

How To Play It: Current valuations are pricing BBY stock to beat EPS expectations. Best Buy's expectations have been lowered over the last few years as they face stiff competition from Amazon, Ebay, HHGregg (NYSE:HGG), and Walmart. Now, it seems that Best Buy expectations may have been lowered too much. Best Buy has is projected to close anywhere from 200-500 stores this year, and that would greatly help EPS for investors. If Best Buy can continue the recent trend of cost cutting, and giving special pricing and price matching offers they will once again regain the crown of top electronics retailer. My personal 52-week price target: $30.50.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Always consult with a registered financial professional before adding a position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.