An Overview Of 5 Key Big Box Retailers

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 |  Includes: BBY, HD, JCP, SHLD, TGT
by: Ry Frank

While big box retail stores often meet resistance from civic leaders, shoppers are drawn to the large selection and low prices they generally provide. Wall Street has been infatuated with these companies as well, with many of them offering nice growth and revenue opportunities. Below, I will explore opportunities for investment in five big box retailers. Best Buy Co Inc (NYSE:BBY), Home Depot Inc (NYSE:HD), JC Penney Company Inc (NYSE:JCP), and Target Corporation (NYSE:TGT) are benefiting from competitive advantages, like a highly trained workforce and diversified product offerings. Meanwhile, Sears Holdings Corporation (NASDAQ:SHLD) is facing significant headwinds, like stiff competition and layoffs. I will discuss how these factors are impacting each company's investment outlook below:

Best Buy Co Inc

As the recession gripped the United States, Best Buy seemed to be a common target of conversation. Struggling at the time to make it through, the company has turned the corner, with a solid blend of electronics, home office products, entertainment products and appliances. With competitive prices and one of the best-trained workforces in the nation, the $9 billion company is finding ways to make money in an aggressive market.

A consistent dividend payer ($0.64 for a 2.5% yield), Best Buy is looking to add growth back to the mix. Currently trading at $25.50 per share, the stock has a 52-week range of $ 21.79 - $33.74 and a one-year target of $28.25. Best Buy has a low forward price to earnings ratio of 7, and combined with its price to book ratio of 1.57, it appears to be somewhat undervalued at this price. Company earnings did drop year-to-year, but revenue was up nearly 2%, suggesting it could be on the rise. The company's financials appear solid, with a debt to equity ratio of 35.7 and free cash flow of $2.16 billion. As consumers begin having more money in their pockets to spend, Best Buy should be ready to help them. Now is a very good time to consider buying this stock.

Home Depot Inc

Home-improvement store Home Deport is actually one of the few housing-related companies that saw an upside from the real estate bubble. The company offers tools and supplies that can be used for improving an existing house. That ability put the $71 billion company in a position to maintain its strength and possibly thrive as the market returns. Currently trading near $46 per share, the stock is up nearly 10% since the first of the year and almost 40% since August. Home Depot pays a $1.16 dividend (for a yield of 2.5%) and has a flat one-year target after gain 20% over the past year.

Although the stock has an uncomfortable price to book ratio of almost 4, its forward price to earnings ratio is a reasonable 16, and the company's quarterly earnings growth of 12% leads me to believe that analysts are undervaluing a possible climb in share price. The stock is trading nearly 20% above its 200-day moving average and trending upward. I recommend investors take a look at adding a position here and capitalize on what could be a very attractive move.

JC Penney Company Inc

Although the past few years have not been kind to big box department stores, JC Penney is one that appears poised to overcome. Focusing on affordable items for the home, the company offers the items (such as clothing) that people need in both good times and bad. Trading in the $42 per share area, the $9 billion company has a 52-week range of $23.44 - $43.18, a one-year target estimate of $40, and the company pays a dividend of $0.80 for a yield of 1.9%.

Although the stock has climbed nearly 25% since the first of the year, its 200-day moving average has leveled off around $34 per share. I feel that is becoming its support point, and shares are likely to have trouble sustaining their current price. The price to book ratio is kind of high (currently just under 2), as is its volatility (with a beta of 1.95). At over 20%, the company's shares are heavily shorted, telling me that institutional investors believe the company can't keep up the pace. Hold this stock as a dividend bearer if you wish, but keep an eye on the share price.

Sears Holdings Corporation

Let's skip straight to the analysis; don't buy Sears at this time. While it is easy to be sentimental about one of the country's premier department stores, the heartless investor inside each of us should be screaming a warning about investing. In short, Sears looks to be a prime candidate for bankruptcy. With numbers like $624 million in total cash and $4.5 billion in debt (and a huge 42% drop in share price over the past year), it will be extremely difficult for this $5.7 billion company to recover.

Sears is cutting workers (with 100 employees from its headquarters recently being laid off), but its biggest problem is that the money simply isn't there. Competition is tight among big box stores, and Sears' recent 1.2% decline in quarterly revenue suggests that things are not good. Add to its problems that over 58% of the company's float is held short, and the analysis is clear…avoid buying Sears.

Target Corporation

After discussing the gloom surrounding Sears, Target Corporation offers a healthier contrast. The $35 billion retail giant is on the rise, and it appears poised to take investors along for the ride. Expanding its operations, (Target plans to open 135 Canadian stores starting in 2013) the company looks to build on recent results, which saw it gain 5.1% in quarterly revenue and 3.7% growth in earnings. The stock is currently trading around $52 per share (with a 52-week range of $45.28 - $56.00) and has a target estimate of almost $58. Although its debt to equity ratio is a bit high at 125, its low percentage of short shares (currently 1%) suggests that investors see the potential. This is a solid mixed stock, and now is a good time to consider taking a position.

The US Department Store Inventory Price Index is starting to rise, offering an indication that fortunes may be climbing as well among the big box stores. Best Buy Co Inc, Home Depot Inc and Target Corporation all appear to be good buys at the current time, while JC Penney is a hold. Sears Holdings Corporation is definitely a sell, especially with the uncertainty surround its viability.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.