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In the last days of December 2012 Best Buy Co., Inc. (NYSE:BBY) was trading at $11.29, which is the lowest since December 2001. June 25, Best Buy's price has more than doubled, and the stock is trading at $26.32. In my opinion, there is still enough space to go higher, and thus it is a good moment to acquire more Best Buy shares.

Company description

Best Buy is the world's largest multi-channel consumer electronics retailer with stores in the U.S., Canada, China and Mexico. Best Buy is the 10th-largest online retailer in the U.S. and Canada. The company has the number one customer loyalty program of its kind and more than 1.6 billion visitors to its websites and stores each year. Best Buy employs more than 160,000 employees who are committed to helping deliver the technology solutions that provide value, enabling access to people, knowledge, ideas and fun - whether online, via mobile device or in stores.

Thesis & Catalyst For Best Buy Co., Inc.

First of all let's look at the price performance for the last 10 years.

(click to enlarge)

Source: Google Finance

Basically, the price of the stock today is the same as what it was 10 years ago. There were good times when Best Buy was trading at the levels of $50 per share. The first correction was right in the end of 2008. In 2009, it bounced back and in the end of 2009 almost reached $50 per share. What struck me with Best Buy was the quite stable and persistent downward movement since the second half of 2010 till the end of 2012.

Financial Highlights

For the last 10 years, without an exception, Best Buy has been growing its revenue with an average increase of 10.5% per annum. Of course, 2011 and 2012 had much lower increase in revenue, only approximately 1% per annum.

Revenue has been growing steadily until it reached the $50 billion level in 2011, and forward on the growth has been slow, almost nonexistent. I think that it is quite important to highlight the stable gross margin, which has been at approximately 25%. Also, the operating margin has been quite stable, and it has been fluctuating in the range from 4.6% to 5.6% for the last 10 years.

To sum up the financial performance of Best Buy, I would like to state that basically the company is doing good and losses, which were suffered in fiscal 2012 and fiscal 2013 (11-month period) were mostly due to impairments of goodwill, and the reason for that was selling off a 50% share in its Europe business that caused losses from continuing operations.

Valuation

June 25, Best Buy is being traded at $26.32. For further consideration, I have a requirement that discounted cash flow valuation outcome has at least a 25% margin of safety. I calculated DCF outcome, which proposes that intrinsic value for Best Buy shares is at $98.30, which gives 73% margin of safety. To come up with this result, I discounted estimated future free cash flows with Best Buy's weighted average cost of capital of 8%. Analysts have estimated that future free cash flows would grow by 4.08%. I used this growth rate for years 1-3, for years 4-6 the rate is decreased by 10%, and for years 7-10 the rate is further decreased by 10% and in 10 more years the future free cash flows will have growth of 2% per annum.

DCF value proposes that Best Buy's intrinsic value is considerably higher, and the stock should cost at least $98.30. This value gives a potential upside move with a potential profit of 273%.

Future Perspectives

There have been many improvements in the company during the last year, which has already triggered an increase in the price, and I think that it will continue to do so. There are few reasons why.

Today, in Oppenheimer's 13th Annual Consumer Conference, Sharon McCollam EVP, CAO, CEO of Best Buy, stated many important factors that should trigger the growth of the company and thus the price of the stock.

First of all Best Buy is implementing a new search engine in its online store. They are replacing its 10-year old search engine with an up-to-date search engine, which should serve customers better than the old one. Also, in the field of search engines, Best Buy will work on appearing in higher positions in search engines, such as Google and others, due to the fact that if you are not on the first page of the results, then no one will find a way to your site or store.

Secondly, Best Buy is working to merge its rewards website with the store's website. It is being done with the aim to be able to send personalized offers to clients, which has not been done until now.

Thirdly, Best Buy will include its stores' stock in the online store databases, thus being able to ship out goods from stores to clients. Until recently Best Buy shipped out goods only from distribution centers, and that led to the fact that quite often the client was driven away from the online store due to the lack of goods in the distribution centers while, in the same time, goods were available in some of the stores. Best Buy has calculated that 2-4% of its online store's visitors left the online store after seeing the following text: "Out of stock." If 2-4% is taken out of 1 billion annual visitors, it is quite a large amount of not earned revenue.

These are only a few things that Best Buy is going to work on and both of those things should bring considerable revenue streams.

Conclusion

When I did research on Best Buy, I was surprised that there are so many things that a company so big as Best Buy has not yet done. It looks like the market has picked up many of them before me, and it seems that I have missed the best entry point. Still, taking into consideration all mentioned and not mentioned future improvements, as well as DCF valuation outcome, I must say that Best Buy is a potential target for purchasing. Time frame for my price target is as follows: I do believe that, in 1-2 years, the price will reach previous heights at $50; further if more improvements will be made, I think that, in 5 years' time, the price could reach $100. Of course, both of these levels can happen sooner if Best Buy outperforms all expectations and the market's hype will be big enough.

Source: Best Buy Is A Good Buy