ModernGraham Annual Valuation Of Best Buy Company

Mar.11.14 | About: Best Buy (BBY)

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Best Buy Company Inc. fares in the ModernGraham valuation model.BBY Chart

BBY data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - FAIL
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - FAIL

Valuation Summary

Key Data:

Recent Price $26.11
MG Opinion Overvalued
Value Based on 3% Growth $5.47
Value Based on 0% Growth $3.21
Market-Implied Growth Rate 30.35%
NCAV -$0.27
PEmg 69.20
Current Ratio 1.30
PB Ratio 2.41
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Balance Sheet - 10/31/2013

Current Assets $11,234,000,000
Current Liabilities $8,665,000,000
Total Debt $1,624,000,000
Total Assets $15,068,000,000
Intangible Assets $703,000,000
Total Liabilities $11,326,000,000
Outstanding Shares 345,560,000
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Earnings Per Share

2014 $2.07
2013 -$1.31
2012 -$2.89
2011 $3.07
2010 $3.08
2009 $2.37
2008 $3.12
2007 $2.79
2006 $2.27
2005 $1.86
2004 $1.63
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Earnings Per Share - ModernGraham

2014 $0.38
2013 -$0.02
2012 $1.00
2011 $2.92
2010 $2.81
2009 $2.61
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Dividend History

BBY Dividend Chart

BBY Dividend data by YCharts

Conclusion:

Best Buy Company presents too much risk for either Defensive Investors or Enterprising Investors at this time. For the Defensive Investor, the company fails the requirements by having a low current ratio, insufficient earnings stability or growth over the ten-year period, and a high PEmg ratio. For the Enterprising Investor, the company does not have a high enough current ratio, and has insufficient earnings stability or growth over the last 5 years. As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should explore other opportunities, such as through a review of 5 Outstanding Dow Components or 5 Low PEmg Companies for the Enterprising Investor.

As for a valuation, the company's EPSmg (normalized earnings) have dropped considerably over the last five years, from $2.81 in 2010 to $0.38 for 2014, leading the ModernGraham valuation model to return a figure that significantly trails the market's implied estimate of 30.35% earnings growth from the $0.38 EPSmg figure. Until the earnings show continued improvement, the company will continue to appear overvalued.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Best Buy Company Inc.? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Best Buy Company Inc. (NYSE:BBY) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.