Opening its first retail outlet in 1966 and going public in 1982, this Northern Minnesota headquartered consumer electronics giant has consistently and forcefully been out ahead of the curve in its Industry. Although the Company and its share price stumbled through the household spending contraction characterizing the domestic landscape since late 2008, it has recently again caught fire in the aftermath of Second Fiscal Quarter operating results. The period ended August 31 --- the Company maintains a February Fiscal Year --- came through with 60 cents a share net after-tax, lots of space above what had been consensus estimates. Press release Company "guidance" on quarters and years immediately ahead were sufficient to arouse further enthusiasm and, as the stock's short interest had edged a little over 4% of the float, the table was set for a spirited price rally. The closing tick on Friday October 1 read 40.76, a 32% advance from its 52 week closing low.
The Company retains its fan base, including the redoubtable Jonathan Laing of Barron's, who in a column dated September 27 blessed the stock and its holders on a number of fronts, projecting an ascent up to the neighborhood of 50, a price echoed by several publishing analysts. Noteworthy is the Company's Free Cash Flow generation prowess coupled with its generous return to its holders. At 60 cents each the per share dividend yield scrapes only 1.5%, but energetic and ongoing share repurchase has placed a sizeable chunk of that Cash back into the hands of investors. As it is now generally assumed that the coming year end Holiday retail season will be a potent one, consensus February 2011 estimates have centered in the zone of $3.60 a share, leaving a P/E on the current year number of only 11.1, well below the stock's historic track. What is there not to like?
It is not without trepidation that I stand athwart tides favored by the likes of Mr. Laing, but so long as freedom of expression and opinion remain a blessing of life in America, here are a few cautionary notes:
- Best Buy's 2009 acquisition of European based Car Phone Warehouse (CPW) was financed largely with debt, principally a five year non-callable note carrying a freight charge of 5.75% --- clearly a stiff tariff in today's credit market. All financing combined were not enough to prompt a credit downgrade --- Moody's continues to log it a Baa --- but enough attention was captured to place the Company on Credit Watch;
- CPW's inclusion has combined with opening operations in Shanghai to render all prior accustomed metrics obsolete in the Company's current configuration. Commonly appealed to measures such as square feet per store and revenue per square foot are newly evolving, as the CPW model focuses on individual outlets of 10,000 or so square feet, contrasted with BBY's more traditional and familiar 40,000 square foot U.S. and Canada layouts. Put another way, the analytical community has no history with BBY's existing business model;
- Things have not gone well so far in China and, quite apart from any future commercial ruin brought on by the U.S. Congress and Administration, it remains to be seen if an improvement is in the offing. All capital expenditures and related financial undertakings in that geography are in suspense, likely to remain that way until the stumbling blocks can be worked ut and overcome;
- Then there is the ubiquitous threat posed by rapidly evolving consumer preferences toward on-line ratailing. Management at Best Buy is not sleeping through the moment, countering potential adverse effects by way of exclusivity contracts with its own vendors, Apple (OTC:APPL) most notably among them. Hopes remain high, but so does uncertainty.
It seems to me that, its attractive price notwithstanding, enough questions and uncertainties loom here for a 1.40 Beta stock to prompt a cautionary approach. (A glance at a five year relative performance chart reveals BBY to have lagged considerably behind such others in the field as HH Gregg (HGG)) I believe a short sale of BBY is unduly risky and imprudent, while advising would be investors to wait and watch. I would actually prefer to enter at $50 (if that indeed is its destiny) rather than the current price, assuming that more is known at that time than today.