Overview: Best Buy (BBY) is the #1 consumer electronics retailer in the U.S., with annual sales of $50 billion in a $175bn industry representing nearly 30% market share. BBY currently has a market cap of $14.6 billion (or 0.3x sales) and 2010E P/E of 10.1x. Projected growth of 12% implies a P/E/G of 0.8x (which signals possibly undervalued stock to us). Dividend yield is 1.7%, with payout ratio of only 17.4%.
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United States (95% of Income): The Company has 1,117 stores in the U.S. as of 1Q10. BBY has several high-margin services including Geek Squad (6 stand alone stores), Magnolia home theatres (8 stand alone stores), Best Buy Mobile (74 stand alone stores), and 35 Pacific Sales locations.
International (5% of Income): Best Buy does not yet have a strong international presence, as shown by the Int’l segment’s 5% of operating income. Internationally the Company has 2,830 stores as of 1Q10. Note however that 2,430 of those stores are Carphone Warehouse locations in Europe, which BBY invested $2.1bn for 50% stake in Carphone Warehouse in 2008. The Company invested in Carphone in order to make a move into Europe, where they will take on Europe’s incumbent retailer DSG International (owns PC World and Currys). BBY will open 5 stores in London in 2010.
The remaining international stores are 158 Five Star locations, 70 Best Buy/Mobile in Canada, 7 Best Buy in China, 144 Future Shops, 5 Best Buy in Mexico, 1 in Turkey.
Approximately 75% of products sold by BBY is related to Consumer Electronics (LCD TVs, digital cameras, etc.) and Home Office (mobile computing, mobile phone). 1Q10 decrease in Entertainment Software is related to industry wide softness in video games sales. BBY also recently announced plans to expand into the used video game rental business, aimed at stealing business from GameStop (GME).
Given there are no direct consumer electronics retailers left (Circuit City went bankrupt), we compared BBY with other large, national retailers that also sell electronics (WMT and AMZN).
BBY trades at 10.1x 2010E P/E, compared to 12.8x for WMT and 45x for AMZN. Note also that GameStop, the video game retailer, trades at 7.0x forward P/E, which is below BBY.
We like the risk/reward of BBY at 10x 2010E P/E. GME may trade at a lower multiple (7.0x), however it’s not just the valuation metric you need to look at. GME’s low multiple reflects the weakness in video game industry outlook (new technology such as NFLX and OnLive are distributing software directly to end consumer, cutting out middle man retailers such as GME) and BBY entering their bread and butter used video game business.
BBY on the other hand, is trading at a lower multiple due to recent earnings miss. Note however, BBY management maintained its full year outlook, and we believe going into back-to-school fall period and end of year holiday season (all retailers are seasonal), BBY will significantly rebound from current levels. Also note recent blowout earnings from smartphone makers (AAPL iPhone 4, MOT (Droid), HTC) as well as Gorrilla Glass maker Corning (GLW), which should signal strong sales at the retail level for companies such as BBY.
Disclosure: Looking to add position in BBY