Best Buy Betting on Stronger Second Half

| About: Best Buy (BBY)

By Sheena Lee

Best Buy’s (NYSE:BBY) share price has dropped from around $45 in late November to under $30, but on average analysts expect the electronics retailer to recover by more than 20% in the next year. However, slumping sales in key products and increased competition has led many to scale back their expectations.

Of 16 sell-side and independent analysts who have changed or reiterated their price targets, 7 have a positive rating, 8 are neutral and one is negative. The median price target has decreased to $37.50 from $41 in our February prognosis, and the mean has dropped to $37.00 from $40.09, but is still 21% higher than today’s closing price of $29.35.

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"Consumers are clearly telling us that they are interested in capturing all the benefits of a connected lifestyle, but they are also selective about how and where they spend," said CFO Jim Muehlbauer. Sales in the second half probably will improve compared with the first as the company invests in its mobile business, he told analysts in a conference call.

Citigroup analyst Kate McShane downgraded Best Buy to Sell from Hold and cut her price target drastically to $27 from $36. McShane said there is continuing downside pressure in the stock despite the pullback in recent weeks.

"Mounting pressure from alternative channels will likely continue to pressure pricing. Critically, BBY is struggling to retain market share gains experienced after the bankruptcy of Circuit City, as other retail channels have stepped up product assortments and pricing. In particular, significant pressure has come from mass discounters and online retailers given favorable positioning in a commoditizing product channel," said McShane.

Best Buy has been fiercely trying to compete against names like Apple (NASDAQ:AAPL), (NASDAQ:AMZN), Wal-Mart Stores (NYSE:WMT) and Costco Wholesale (NASDAQ:COST), said analysts.

"With the Internet and smartphones, we don’t need to shop at Best Buy to figure out which TV or electronics we want," said Michael Pachter, an analyst at Wedbush Securities. "Their solution may be good for 2011 but will be irrelevant by 2014. Technology is going to pass them by like they’re standing still." Pachter reiterated a Hold rating on Best Buy but lowered his price target to $31 from $37.50.

Goldman Sachs analyst Matthew Fassler maintained a Neutral rating on the company, saying "Results were not materially different from expectations, though margins were certainly on the lighter side." Fassler decreased his price target to $34 from $36.

Chris Horvers of JPMorgan points out that Best Buy needs a macro acceleration for consumers to begin to upgrade the cadre of electronics products they adopted over the past decade. Longer term, "our concerns regarding the product cycle commoditization and market share shifts should continue to result in a lower relative valuation vs. the group and the market," said Horvers, who has a Neutral rating and lowered his share price target to $35 from $37.

Daniel Binder of Jefferies & Co. also kept a Hold and decreased his target to $31 from $35. The lack of a major share donor and price transparency with retailers selling online could continue to force price matching and presents market share and margin risks for Best Buy, said Binder.

FBR Capital’s Stephen Chick noted that "the company is selling some higher gross margin categories, such as mobile phones and services; but sales of these items are not enough to absorb sales-per-sq.-ft. declines and related SG&A de-leverage." Chick has a Market Perform on the stock and slightly lowered his target to $34 from $35.

Best Buy’s TV business is also a main concern for analysts. "It is very difficult for Best Buy to post positive comps when a category that is 20 percent of their sales is coming down double digits," said BB&T Capital Markets analyst Anthony Chukumba, who has a $40 price target on the retailer.

"The TV category is going to be very tough in the first half of the year," said David Strasser, an analyst at Janney Capital, who rates the firm at a Buy and estimated that TVs accounts for about 15 percent of sales. "There’s been little excitement to generate interest." Nevertheless, Strasser has a high $46 target on the company.

Piper Jaffray analyst Jonathan Berg maintained an Overweight rating but lowered the company’s stock target to $39 from $46. "We are reducing our multiple to 11x from 13x to account for slower growth in F12." Peter Keith of JMP Securities reiterated a Market Outperform rating on Best Buy but trimmed his price target to $40 from $41.

Scot Ciccarelli of RBC Capital lowered his target to $38 from $42, but kept the firm a Top Pick, noting that " … this year will be very back-end loaded, which is disconcerting to investors given how volatile their business has proven to be."

Oppenheimer analyst Brian Nagel also adjusted his target lower to $36 from $39, and repeated a Perform rating. Nagel does not foresee BBY shares moving meaningfully higher or garnering a premium multiple so long as sales in core segments languish.

Bradley Thomas of KeyBanc Capital Markets Maintained a Buy rating and $42 target, but noted that "sentiment appears negative, and while valuation is supportive, shares may lack a catalyst until top-line trends improve."

Credit Suisse analyst Gary Balter, who has a $42 price target on Best Buy, said analysts’ estimates factored in the assumption of share repurchase. That means the retailer should be able to yield higher profit than its guidance suggests, he said.

Deutsche Bank’s Mike Baker kept a Buy rating on the retailer and has lowered the firm’s price target to $37 from $42. Despite increasing competition from Apple and others, "we think BBY outlined some potentially favorable opportunities around categories where BBY has low share, including mobile phones, gaming and appliances. In addition, BBY is taking steps to reduce store size and to increase its e-commerce business," said Baker.

Source: Alacra Pulse, Zacks, Seattle Times, Street Insider, Reuters, Bloomberg, Market Watch.