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Shares of Best Buy (NYSE:BBY) continue to set fresh highs in 2013 on the back of a "late" upgrade by UBS. The company and stock is in a completely different world compared to just a year ago, when many where wondering if it would be the last holiday period for the then troubled retailer.

After great momentum this year, I think the upgrade from UBS comes a bit late, and I would not jump on the bandwagon.

UBS Sees Another Leg Higher

Analysts at UBS upgraded Best Buy from "Neutral" to "Buy", while raising the price target on the stock by $14 to $49 per share. Even though the bank attached a buy rating to its advice, the target implies a modest 11% potential.

Analyst Michael Lesser says the move in the share price has been about earnings multiple re-rating, with implied price-earnings ratios increasing. Further share price appreciation will be driven by analysts earnings estimates which will be revised upwards. Lesser sees consensus estimates for 2014 earnings increase to levels above $3 per share, while earnings in 2015 could come in above $3.50 per share.

Lesser sees Best Buy reporting earnings of $2.45 per share for the fiscal year of 2014.

Valuation

Note that Best Buy is scheduled to release its third quarter results next week. The company ended its second quarter with $1.91 billion in cash and equivalents. Total debt stands at $1.68 billion, for a net cash position of around $230 million.

Revenues for the first six months of the year came in at $18.68 billion, down 5.2% on the year before. Net earnings advanced slightly to $185 million. Earnings from continuing operations came in at $334 million.

Full year revenues could come in around $43 billion as consensus estimates for earnings stand at $850 million.

Trading around $44 per share, the market values Best Buy at $15 billion. This values operations of the firm at 0.35 times annual revenues and 17-18 times annual earnings.

Best Buy currently pays a quarterly dividend of $0.17 per share, for an annual dividend yield of 1.5%.

Some Historical Perspective

Last year's rally has softened the pain for long-term shareholders a lot. For most of the past decade, shares of Best Buy have traded in a $30-$60 trading range.

On the back of a near bankruptcy last year, amidst a lot of speculation about a last-minute deal last year, shares fell to lows around $10 in January. Ever since shares have quadrupled amidst large and fast operational improvements.

Note that between fiscal year of 2009 and 2012, annual revenues fell by a cumulative 8.5% to $45.1 billion. After reporting billion dollar earnings in 2009 and 2010, Best Buy reported losses in the two year's following. Over the past four years, Best Buy has reduced its share count by about a fifth.

Investment Thesis

It seems that UBS is a bit late in the game to upgrade shares of Best Buy at current levels.

Back in August of this year, after Best Buy reported its second quarter results, I last took a look at the company's prospects. At the time I concluded that the runaway momentum in the stock outpaces the speed of fundamental improvements. Ever since, shares have risen by another quarter to current levels at $44 per share.

Under its Renew Blue strategic plan, Best Buy is showing decent online sales growth, improved promotor scores, in-store boutique stores as well as continued cost cuts which are ahead of plan. Furthermore, Best Buy sold its stake in the European joint venture with the Carphone Warehouse.

The progress is here, and for now Best Buy has fenced off continued competitive pressures from giants like Wal-Mart (NYSE:WMT) and Amazon.com (NASDAQ:AMZN). The market has priced in the current improvements and more. Even if Best Buy can report annual revenues of $50 billion going forwards in a few year's time, combined with earnings around $1.5 billion, the current valuation already seems fair. This is especially true given that it will take some time to get there.

The current share price reflects a great deal of optimism, a bit too much to my taste. Operational improvements have been impressive this year, but share price returns have been spectacular. I applaud management for doing a great job, but the current valuation is too high to initiate a buy position at these levels.

Source: Best Buy: What A Difference A Year Makes