Best Buy (BBY) used to be one of the stock market's favorite growth companies, as it rose from a split adjusted 25 cents a share in 1990 to $20 a share by the end of the decade. Since then, the company has been in a rut, underperforming the S&P 500, as worries about Amazon (AMZN) and other potential competitors have risen. Here are the six things I looked at while researching Best Buy:
Valuation: Best Buy's trailing 5 year valuation metrics suggest that the stock is undervalued, as all three of the metrics are below their respective 5 year averages. Best Buy's current P/B ratio is 1.6, and it has averaged 2.9 over the past 5 years, with a high of 6.2 and low of 1.4. Best Buy's current P/S ratio is 0.2, and it has averaged 0.4 over the past 5 years, with a high of 0.6 and low of 0.2. Best Buy's current P/E ratio is 8.7, and it has averaged 13.2 over the past 5 years, with a high of 17.8 and low of 7.7.
Price Target: The consensus price target for the analysts who follow Best Buy is $28. That is upside of 13% from today's stock price of $25.08 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
Forward Valuation: Best Buy is currently trading at about $25 a share, with analysts expecting EPS of $3.69 next year, an earnings increase of 9% y/y, for a forward P/E ratio of 6.8. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. Gamestop (GME) is currently trading at about $23 a share, with analysts expecting EPS of $3.16 next year, an earnings increase of 10% y/y, for a forward P/E ratio of 7.2. Radioshack (RSH) is currently trading at about $8 a share, with analysts expecting EPS of $0.76 next year, an earnings decline of -18% y/y, for a forward P/E ratio of 10. HHGregg (HGG) is currently trading at about $13 a share, with analysts expecting EPS of $1.25 next year, an earnings increase of 14% y/y, for a forward P/E ratio of 10. The mean forward P/E of Best Buy's competitors is 9.1, which suggests that Best Buy is undervalued relative to its publicly traded competitors.
Earnings Estimates: Best Buy has beat EPS estimates 2 times in the past 4 quarters. The company's EPS figures have come in between -6 cents and 13 cents from consensus estimates or about -11.3% to 7% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a relatively wide margin which suggests that the stock may experience upside from earnings surprises.
Top Stock Holders: The top two funds that own Best Buy are Fidelity Low-Priced Stock, which owns 17.2 million shares or 4.76% of the shares outstanding, and Vanguard Total Stock Mkt Idx, which owns 3.8 million shares or 1.06% of the shares outstanding. The top two institutions that own Best Buy are Fidelity Management and Research Company, which owns 24.4 million shares or 6.74% of the shares outstanding, and Tradewinds Global Investors, LLC., which owns 23.8 million shares or 6.5% of the shares outstanding.
Price Action: Best Buy is down 26.4% over the past year, underperforming the S&P 500, which is up 3.7%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $24.5 and below its 200 day moving average, which sits at $25.29.
Conclusion: The market is pricing in deep declines in the company's business as it continues to try to fight off competitors from taking market share. Since it is an ex-growth company, of course the valuation metrics will suggest undervaluation. Analysts, though, aren't too bullish here, and I agree, as it is probably worth staying patient on the stock and seeing how the company is able to deal with the competitive pressures from cheaper alternatives. Best Buy may experience a bit of a boost as the economy continues to recover, and consumers have more discretionary income to spend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
