Why Best Buy May Be a Great Value Play

| About: Best Buy (BBY)

A few weeks ago I gave my list of the Best Sectors To Invest In For 2011. One of my picks was certain specialty retailers. There is one retailer that I think is finally a value play. It is trading at a single digit multiple.

The company whose stock that I like is Best Buy (NYSE:BBY).

Best Buy Inc. is the largest specialty electronics retailer in the United States. Best Buy has a 19% share of the $170 billion dollar United States consumer electronics market. Best Buy has a 6% stake in the global consumer market. Best Buy has a market cap of $12.7 billion dollars and 180,000 employees.

Shares of Best Buy have plummeted recently as the stock has dropped from nearly $50 a share to the low 30s. Investors have abandoned the stock as fears have grown about the retailer's ability to expand outside of the United States. Best Buy is down nearly 15% this year. The company has seen margins being squeezed due to increased competition and the company’s expansion plans into foreign markets has not gone as smoothly as expected.

Gross margins are still high at 25% but operating margins have dropped down to the 4s the last three years. Revenue growth has been solid at 12.6% over the past five years. Best Buy’s online sales growth is dropping however. Best Buy reported online sales growth of just 7% last year. That’s down dramatically from the 16% number in Q2 and 26% in Q1.

Best Buy Is A Value Stock

Best Buy is cheap based on a number of valuation metrics. The stock trades at a forward P/E ratio of 8.9. 0.7 times earnings growth and a 0.3 price to share ratio. The stock trades at 2.1 times the stock price and at 6.6 times cash flow. Best Buy is not yet a dividend play because the stock has a mediocre yield of 1.9%.

The company has one of the best balance sheets in the retail sector with nearly $1 billion dollars in cash and $1.8 billion dollars in debt. Return on equity is high at nearly 24% and return on assets is respectable at 7%.

Best Buy is currently undergoing a massive restructuring in its overseas operations. The company has closed stores in China and Turkey. Despite the setbacks, the company is not giving up on its overseas growth. Best Buy plans to open 50 Five Star stores in China over the next year and150 Best Buy Mobile stores in the U.S. Best Buy plans to open 18 stores in the United Kingdom, Mexico and Canada by 2010.

I think that the stock has been oversold. There isn’t much downside risk in the stock since it is trading at such a low multiple. Long term investors are getting a chance to buy a solid retailer at a reasonable price.

Disclosure: None

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