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About a month ago, I wrote a valuation article that claimed, “Best Buy’s (BBY) stock is living up to its name as the market’s recent punishment has led to an unprecedented level of value.” When I wrote my article, it was my opinion that BBY was, without a doubt, the "best buy" in the retail sector, and current market pricing coupled with their most recent report only serves to strengthen my position.

Market Price:

BBY is currently trading at $23/share for a total market cap of 8.5B (based on 372M shares outstanding as of 13 Sep 2011). Best Buy has been trading in a weak range for the past 6 months. However, this is the lowest price level seen consistently since early 2003 (1 month dip below in late 2008).

Disappointing- but Encouraging Results:

In an extremely weak economy, Best Buy still managed to grow revenues (albeit by under 1%). However, this success at maintaining sales was overshadowed by a large drop in operating income (30%). This drop, mainly due to decreasing margins, was already priced into BBY and did not come as a surprise. The only surprise was that revenues remained steady, when a 2-3% total drop was expected (2.8% same store drop was offset by foreign +online growth). With the recent quarter included, BBY trades at a 12-month trailing P/E of 6.8. Best Buy experienced 9% growth in their mobile computing division, coupled with a 12% sales growth in appliances.

The key factor in this quarter is that BBY still managed an EPS of 47 cents during a traditionally weak quarter of an unusually weak year for retail. BBY has shown that it can still turn a meaningful profit during strong economic headwinds, while also returning significant value to shareholders.

Strong Dividend & Repurchase Plan:

Best Buy currently pays a quarterly dividend of 16 cents (2.8% yield), with a 5-year annualized growth rate of 9.85%.

Best Buy has repurchased 92.5M shares in the past 5 years (19% reduction), and has repurchased 29.2M shares in the last reported 6 months. Best Buy announced a new $5B buyback plan in mid-June of which over $4.6B in authorization remains. The current authorization represents 54% of outstanding shares at current market prices.

Potential Upside:

Beyond the obvious potential upside of a 50%+ reduction in outstanding shares over the next 2-3 years (based on historical operating cash flows), BBY has the potential to benefit domestically from changing tax policies and internationally through its various investments.

Changing Tax Policies: Best Buy has been hurt domestically by online retailers such as Amazon (AMZN). However, many states are enacting sales tax laws targeting online companies such as Amazon. There is also a national online taxation bill that is being proposed by Senator Durbin that will target Amazon, as well as other online retailers.

If the tax policies are changed, BBY’s online store will likely become more competitive. Even with the taxation disadvantage, BBY grew online revenues by 13%.

Foreign Investment: In a recent strategy presentation, BBY outlined a plan to grow to 400-500 5-Star stores within the next five years while increasing annual Chinese revenues to $4B annually. In today’s report, Best Buy boasted 7% same-store sales in China.

Time to Invest?

In my last article, I predicted that: “nobody can truly call the market (or stock) bottom; however, BBY is trading at an insanely cheap valuation.” Since my last article, BBY has lost roughly 4.2% of its share price. I am still recommending BBY, with increased conviction. However, once again please note that the true pricing floor can only be called in hindsight.

Disclosure: I am long BBY.

Source: Best Buy Continues To Be A Good Value Play