Best Buy Shares Under Close Watch Following Run-Up

May.20.13 | About: Best Buy (BBY)

By: Brendan Gilmartin, VP Research & Content

Best Buy (NYSE:BBY) is scheduled to report 1Q 2014 earnings before the opening bell on Tuesday, May 21. The earnings are expected at 7:00 a.m. EST and will be followed with a conference call at 8:00 a.m. Best Buy is expected to garner close scrutiny this period given the recent turnaround efforts and the fact that the shares have more than doubled year-to-date to a recent high near $27.00, a level not seen since mid-2011.

Outliers And Strategy

Best Buy is expected to post a profit of $0.25 per share for the 1Q 2014 period. Forecasts range from $0.14 to $0.32. (Source: Yahoo! Finance)

Revenue for the period is seen dropping 8.3% from the year-ago level to $10.64 bln. Some estimates are running has high as $11.0 bln.

Comparable Store Sales: According to Zack's Institutional Research, Best Buy's comparable store sales are seen falling 5.3% for the 1Q period.

Best Buy shares are quite active on earnings. The average move in response to quarterly results is just over 6% while the options market is currently pricing in a 8% change in the stock price.

Despite the recent run-up in Best Buy (+127% YTD), shares are trading for just 11.16x forward earnings and a mere 0.2% sales. The debt load is manageable and the company has $5.38 per share in cash on its books while paying a 2.5% dividend.

Recent News

  • 04/30: Best Buy sold its 50% interest in Best Buy Europe, the joint venture it created in 2008 with Carphone Warehouse Group plc (CPW). The sale price was GBP 500 million (approximately $775 million as of April 29, 2013).
  • 04/30: According to a report on Barron's Online, Deutsche Bank upgraded Best Buy from Hold to a Buy rating and increased the price target from $17 to $28. The firm reportedly cited expectations for stronger than expected 1Q earnings, cost-cutting efforts, waning competitive pressures through effective price-matching and a solid balance sheet. The firm also boosted the 1Q earnings estimate to $0.32, well above consensus estimates.
  • 04/22: Wedbush reiterated an Underperform rating on Best Buy, with a price target of $9.00, according to a post on StreetInsider.com. The firm cited doubts over the company's turnaround efforts and smaller margins.
  • 03/25: Best Buy Founder, Richard Schulze, returned to the company as its Chairman Emeritus to support transformation efforts.
  • 03/04: Best Buy authorized payment of a regular quarterly cash dividend of $0.17 per share. The current yield is 2.53%.

Technical Review

Best Buy shares have been breaking out in recent months, climbing to the highest level since mid-2011, following a 127% YTD increase. The shares are now just shy of longer-term resistance in the $27.50 area. Failure to overcome that mark or a tepid earnings release could drag the shares toward near-term support near $26.00, with downside risk to the 50-Day SMA near $24.00, followed by $22.00 (chart courtesy of StockCharts.com).

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Summary

Best Buy shares have been on a tremendous run YTD, benefiting from initial upbeat results from its turnaround efforts, cost-cutting to support margins, the sale of its stake in Best Buy Europe, and a robust balance sheet, with more than $5 per share in cash on its books. But given the magnitude of the recent run-up, the shares nearing a multi-year technical resistance zone, and diminished volume in recent weeks, Best Buy could be poised for a pullback, barring a stellar earnings release.

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