Best Buy: True To Its Name

| About: Best Buy (BBY)

Best Buy Co. Inc. (NYSE:BBY), one of the most-recognized retailers of "consumer electronics, computing and mobile phone products, entertainment products, appliances, and related services," has had a very bumpy year to date. Beginning in January with a price around $23.60, BBY shareholders were taken on a roller coaster ride to near $27.50 in late March before a drastic decline to current trading levels of $18.50. Recent management drama has also driven the stock to near $18 levels in the worst trading week of the year so far.

A year ago, when shares of Best Buy were trading in the $30-$40 range, many analysts were quite bearish on the stock's prospects, and their predictions seem to have come true. Chief competitors Apple (NASDAQ:AAPL), Wal-Mart (NYSE:WMT), Amazon (NASDAQ:AMZN), and RadioShack (NYSE:RSH) have all experienced problems of their own in recent months. If analysts were talking about a buyout in 2011, the potential for a management or private equity buyout of the firm is even greater now, with equity share prices near half of what they were last year. For new shareholders, the chance of a substantial premium is icing on top of the cake. Of course, the same has been said about RadioShack for years, especially with the recent dip in RSH share price - so relying on a buyout may not be the safest bet.

However, potential shareholders still have many opportunities to reap gains by buying into Best Buy at $18: Standard & Poor's analyst estimates puts a 12-month target price for Best Buy Co. Inc. at near $26.00, citing a risk assessment that reflects "BBY's strong balance sheet, sizable market share, numerous suppliers and buyers, and a history of profitability." With such significant upside potential, though, these analysts did warn of BBY's potential downside risks, including "a highly competitive environment for consumer electronics retailing, with numerous rivals and strong price competition."

As the electronics retail industry evolves and chains such as Best Buy take extreme measures to ensure profitability, fundamental metrics including EPS are likely to stay volatile. This has indeed been the case over the last few years with BBY, with EPS of $3.08 in 2011 falling dramatically to -$2.89 in 2012. Still, with the recent spate of store closures across the country, Best Buy management has demonstrated its ability to make difficult decisions in the best interests of shareholders.

One of the most recognizable brand names in consumer electronics, Best Buy's comparative advantage in the industry must not be discounted; its presence remains significant at nearly 4,300 stores across the globe in North America, China, and Europe. In fact, many critics bearish on BBY point to the store closures as a sign of Best Buy's going the way of longtime rival Circuit City - but at the same time, the firm has opened 50 new stores in China and over 100 new Best Buy Mobile standalone stores or kiosks in the United States, demonstrating again an impressive and efficient adaptive attitude on the part of management.

The dividend yield on BBY shares also remains promising. Per-share annual dividend of $0.64 translates to an approximate 3.55% yield. Combined with a strong market capitalization of over $6.2 billion, this makes for a substantive bullish case for Best Buy, which has not been ignored by institutional investors (who comprise over 70% of shareholders).

Perhaps the principals involved in these investing decisions take note of management's repeated share repurchases, which strongly outweigh the volatility and subsequent decline in EPS over the last year. Valuation of free cash flows into the future using earnings multiples as discussed puts BBY equity share price at over $26. Given this, I can only attribute the recent dismal performance to Eurozone-related economic uncertainty and sharp declines in consumer confidence - issues that could very well persist through the summer and contribute to significant downside.

Still, on balance, I believe the outlook on equity shares of BBY is true to the company's name. The market failure to price in the true value of these aspects represents a marvelous opportunity for brave investors. I would buy BBY at any price below $23, to leave some margin of error - and hope to realize gains before 2012 is out.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BBY over the next 72 hours.