Seeking Alpha
Long only, contrarian, special situations, value
Profile| Send Message| ()  
Best Buy (BBY) is one of the worst performing big-cap stocks of 2011 and is now selling at $28 and change, a level not reached since 2008. There are a myriad of reasons for Best Buy’s recent performance. Lackluster sales, concerns about consumer spending due to rising gas prices, increasing challenges from online competition, poor notebook computer sales prospects and a recent security breach have added up to a lousy start to the year. Best Buy is trading at the lowest valuations in recent memory. So, is the stock a bargain or a value trap? Let’s examine the arguments.
Bargain: Best Buy is trading at just over 8 times this year’s earnings, a Price to Sales ratio of under .25, and PEG ratio of approximately .75. The company has a solid balance sheet, excellent cash flow, and even a decent dividend yield of slightly over 2%. It is the unquestioned leader in its segment. It also has a growing international presence and its online sales are increasing by double digits. Its customer centric model should serve it well and allow it to continue to increase market share in the consumer electronic retail space.
Value Trap: The industry is facing a potential saturation of flat panel TVs. Best Buy’s online sales are not growing nearly as fast as its more nimble competitors like Amazon.com (AMZN). The stock is likely to have flat earnings year over year. Notebook sales prospects are pretty dismal. It also lacks near term catalysts to ignite its sales and the continued rise of gas prices is very worrying for discretionary consumer spending.
Prognosis: Although I do not see any near term factors that could significantly impact sales or earnings in the short term, it is hard to pass up Best Buy at these valuations. It is the market leader in a growing sector of the retail market, the company is well run and has good marketing, and has a very solid financial balance sheet. Although there may be better places to put your money in the short term, I believe that picking up Best Buy at these levels will turn out to be a good decision 12 to 18 months out. I am personally selling slightly out of the money short term puts to generate premium and/or pick up Best Buy at a slightly lower price given all the negative news recently.
Disclosure: I am long BBY.
Source: Best Buy: Bargain or Value Trap?