Cowen: Circuit City, Best Buy to Gain From FPD Growth; Radio Shack 'Has Lost Its Relevance'

Includes: BBY, CCTYQ, RSH
by: Eric Savitz
Jonathan Cramer, an analyst at Cowen & Co., on Friday started coverage of Circuit City (NYSE:CC) and Best Buy (NYSE:BBY), both with Outperform ratings, and RadioShack (NYSE:RSH), which he rates Neutral. Cramer asserts that “differentiated reatailers, such as CC and BBY, are well positioned to outpace overall consumer electronics sales through their comprehensivce products and services offerings.”

The most interesting aspect of Cramer’s call is this: he thinks flat-panel TVs are going to take a steadily increase share of the overall consumer electronics pie, crowding out other products. For Best Buy and Circuit City, he argues, that’s a good thing, since people are more likely to buy extended warranties and installation services for flat-panel TVs than for other consumer electronics categories.

  • Best Buy, he writes in one of several research notes this morning, should generate long-term EPS growth in the mid-teens with a low 20% return on invested capital, “given its defensible competitive advantage achieved through scale, a comprehensive service offering and differentiated shopping experience.” He thinks the company can grow its market share by 40-60 basis points a year for the next few years; he also believes the company can expand its operating margin from 5.3% in 2006 to 7% in the next several years, driven by growth of its service business, supply chain improvements and “creating efficiencies in its Canadian stores.”
  • Circuit City, he says, “has made great strides to revitalize its core operations and competitive position,” but remains in “the early stages of its turnaround.” He thinks the company can show steady improvement in both its EBT [earnings before taxes] margin and in its return on invested capital.
  • Cramer is less keen on RadioShack. “After several years of deteriorating returns, RadioShack is in the midst of a complex turnaround,” he writes. “Under the leadership of a new CEO since July 2006, the comapny is attempting to restructure its core operations and regain its relevancy within the consumer electronics sector.” But there’s a problem, he says. “RadioShack has lost its relevancy to core customers as competition has eroded its competitive advantages. Its merchandise is undifferentiated, its stores are not longer the most convenient destination, and its competitors have developed their own comprehensive service models.”