Our Recommendation: Wait for clarity on Q4 performance (quarter results will be announce in Feb 2013) before initiating any change in stock position.
Fair value estimate: $20 - $24.
See valuation grid below for how the numbers stack up.
Turnarounds are hard and the vast majority of companies fail. For BBY a lot of the bad news has been priced in. Failing any evidence of a sustained recovery in top line growth this stock should be avoided - however on the flip side if they do manage to beat low expectations there is tremendous upside.
The leadership team at BBY is in turmoil. The current CEO has been in office for a few months now, the search is on for a new CFO and there is a large degree of uncertainty regarding the strategy for the company going forward.
Total Returns over 2 years
The chart above says it all. BBY investors have been taking a bath. In 2 years the total return on the stock is down 60% while competitors like Amazon and Walmart are up 40%. Just in the last month the stock has lost 10% to move below $16. This despite talks about a buyout offer valuing the stock at roughly $24 . Clearly the market has given up on this stock.
This is where it gets interesting. A dcf analysis with conservative estimates of negative/low growth for the next few years still prices the stock above its current price. See details below. Particularly with a worst case estimate of ~ 45B in revenues for the next 7-8 years.
Low growth stocks typically have lower multiples and BBY is no exception. Based on EV/EBITDA it's trading below radio shack.
BBY - Price versus EPS Overlay
In short, BBY holds a lot of promise, the market has basically written them off and they might well be -- however Thanksgiving/Christmas sales and the pending Buyout offer should support this stock and potentially drive it higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.