Hubert Joly Will Strengthen Best Buy's Valuation

| About: Best Buy (BBY)

Hubert Joly, now-former CEO of hotel/restaurant giant Carlson, was announced as the new CEO of Best Buy (NYSE:BBY) earlier this morning. Joly will replace interim CEO Mike Mikan, who received a lukewarm-at-best reception from Wall Street following former CEO Brian Dunn's scandal-laden departure in April. Brian Dunn was at the center of a controversy involving an improper relationship with a female employee, which also led to the forced resignation of Best Buy Founder, Richard Schulze, as Chairman of the Board. Mikan had recently pitched his own turnaround plan for Best Buy which involved re-training over 50,000 store employees and decreasing the size of many of its locations, but Wall Street shrugged his ideas off. Management disruptions and a misperceived accounting loss in 2011 have led to a chaotic year for Best Buy stock as shown below (Source: Google Finance).

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The Problem with BBY

The Best Buy bear case is commonplace, with many believing that Amazon (NASDAQ:AMZN) will continue to pressure Best Buy's revenues, margins, and ultimately their profits until the big-box retailer finally becomes irrelevant, or even bankrupt. Expectations for Best Buy are dismal, and the market hardly reacted to Schulze's $24-$26 offer. Following the offer, US News reported "Best Buy's best days are probably over," mentioning the "loss" in 2011 as a key sign of disaster. As I've mentioned before in my recent coverage, Best Buy represents a prime trade as well a strong investment opportunity. The problem with Best Buy is not performance, but rather perception.

How does Hubert Joly Help?

Simply put, Joly is here for perception. Best Buy is currently the subject of a takeover offer by founder Richard Schulze. Schulze has offered to pay $24 to $26 per share to take Best Buy private in a large equity and debt deal valued at roughly $8.84 billion. The Wall Street Journal has stated from a source "familiar with the matter" that Best Buy's Board wants to wait until after earnings on August 21st to discuss the deal. With Joly onboard as the new CEO, Best Buy's board will likely have additional leverage, especially if earnings beat expectations.

Perception is Key

As witnessed by Amazon's lofty valuation, eloquently dissected by fellow contributor Colin Doyle, perception is much more important in the stock market (at least in the short-term) than actual fundamental results. Short-term perception and valuation is everything to Best Buy. Faced with a lowball takeover bid, BBY needs to rapidly buoy their stock valuation. Although Best Buy has beaten earnings estimates by a significant amount in the past two quarters, the stock has considered its slide. I believe that Best Buy will significantly beat expectations tomorrow, but that it won't matter without Hubert Joly at the helm. Analysts have shown that they don't care for BBY's strong EPS projections, or for impressive free cash flows, so why pay attention to a quarterly beat? Analysts want talking points, and Joly is going to deliver.

Powerful History

Best Buy obviously needs the perception of a strong turn-around play, and Joly is one of the best. His record includes restructuring Vivendi's video game business and turning around EDS prior to their acquisition by Hewlett-Packard (NYSE:HPQ). Prior to his CEO position at Carlson, he served as CEO at Carlson Wagonlit Travel (NYSE:CWT). At CWT, Joly boasted an annualized revenue growth of over 30% for 4 years ($8.9B in 2003 to $25.5B in 2007). This is the type of resume that Best Buy needs to add to their management team. It doesn't matter if Joly actually accomplishes anything; with him at the helm, Wall Street will likely pay attention to the strong profits that BBY will likely continue to produce.

Trading/Investing Implications

In my opinion this makes the Best Buy trade even juicier, and also improves the long-term picture. Best Buy is so irrationally undervalued and disconnected with key fundamentals that it will take a strong positive perception of management to budge the ticker. With Joly at the helm, perhaps positive results will finally begin move BBY higher. If Best Buy is not bought out prior to year-end 2012, a likely record-breaking year will cause the stock to soar, and Joly will be hailed as a genius.

Disclosure: I am long BBY.

Additional disclosure: I am short AMZN.