Morgan Stanley analyst Gregory Melich Friday morning cut his rating on Best Buy (BBY) to Underweight from Equal Weight, noting that the consumer electronics retailer’s stock has outperformed the S&P 500 by 80% since last October. At Thursday’s close at $39.04, he says, the stock is discounting a quick recovery of margins to 5% or higher - but he thinks they will stay below 4.5% into 2010. Melich says the company’s “survivor” status remains, but that the stock has become too risky.
On a surprising note, Melich contends that first quarter market share data for TV sales suggests that Circuit City’s TV sales appears to have been split between Wal-Mart (WMT) and Amazon (AMZN), rather than to Best Buy. He notes that while CC’s TV market share fell in half in Q1 for obvious reasons, BBY lost share as well, with WMT gaining ground at the low-end of the market and AMZN picking up business at the high end.
Melich adds that while the Street sees EPS for the February 2011 fiscal year growing to $3.02 a share from an estimated $2.77 in FY 2010, he thinks the number will actually shrink to $2.55, from $2.65. “The main drivers of this risk appear to be outside the company’s control,” he writes, including the direction of ASPs in laptops - hello, netbooks! - and TVs. He also notes that consumer electronics share of wallet has typically slipped for four years around a U.S. recession.
BBY Friday morning is down 94 cents, or 2.4%, to $38.10.
