Best Buy - At Least A Good Buy

| About: Best Buy (BBY)

It's no secret that Best Buy (NYSE:BBY) has been struggling a lot lately and the stock price has reflected this - currently a mere 36% off its 52-week high. In these situations we often see people ask if there is such a thing as a price that is too cheap to ignore. I can comfortably proclaim that if a company is going to fail, there is no such thing as a cheap enough price that will get me to buy its stock - I refuse to pay for the privilege of having losses to offset my capital gains tax.

I believe that BBY is not on a road to failure and, given it's very low share price, a good buy.

Not Another Circuit City

In 2009, the second largest electronics retailer, Circuit City filed for Chapter 11 bankruptcy and closed its doors for the last time. Now, as BBY struggles, comparisons cannot help but be drawn. But whereas Circuit City failed when it failed to adapt in a changing market the same cannot be said about BBY.

As more and more of the market shifts online, there have been legitimate concerns about a ground based company being able to compete - Amazon (NASDAQ:AMZN) is now seen as BBY's biggest competitor. Not only does AMZN offer cheaper prices, but it also delivers items directly to your doorstep! Wisely, BBY has been working recently to boost the presence of its website. Whereas discussions are currently about BBY being a showroom for AMZN, with proper managing of its own website it should become a showroom for it's own website.

One could argue that it clearly isn't doing a very good job of creating an internet presence if the website can't handle its shoppers and instead cancels their orders. It's certainly not its best moment, but neither is it the worst - after much effort in improving its website and increasing its capacity, it is a good indicator that its internet traffic is not only increasing, but increasing much faster than expected. Take a look at BBY's website traffic - Black Friday 2011 showed a 56% increase in traffic on 2010 and, in December, continues to beat last year.

Meanwhile a significant competitive advantage of AMZN's will disappear as more states force it to pay sales tax - notably California in September 2012. This will take a significant amount of pressure off BBY's margins, which have been declining in order to maintain revenue.

BBY faces an uphill struggle - the company will need to continue to improve its web presence, figure out how to improve margins without losing revenue, and improve its customer service (which has been a constant magnet for criticism), but it has a solid foundation and is making steps in the right direction.

A Very Cheap Bargain

Earnings this year have been pretty disappointing, but the reaction to them has been inordinate.

Let's look at earnings, the trailing 9 months have posted $1.29 in earnings, as opposed to $1.50 in last fiscal year. This represents a 16% drop in profits. But what lies ahead in 2012Q4? Last year, 2011Q4, posted 1.62 EPS. If we apply this 16% decrease, we would expect $1.36 EPS. But the 2011Q3-2012Q3 drop was 29% - applying this we would expect $0.99 EPS. For the sake of being conservative, we can also imagine a scenario where EPS decreases 50% to $0.81. Look at what happens to the FY2012 results below and the resulting P/E ratios:

EPS and P/E

2012Q4 Decrease 0% 16% 29% 50%
2012Q4 EPS $1.62 $1.36 $0.99 $0.81
FY2012 EPS $2.91 $2.65 $2.27 $2.08
Forward P/E ($23.50) 8.1 8.9 10.4 11.29

So which will happen? Given the very strong results on Black Friday - note the improved nationwide results as well as website traffic - I'm bullish about the results. Based on forward P/E, this is a steal.

The balance sheet is strong with little long-term debt - roughly 12% of assets. It has held this more or less steady since an increase in 2008. It has 6.65 cash/share on hand - which has been steadily increasing. I could go into more depth, but I would just be summarizing information that is already available to you rather than adding new analysis. My point is that BBY has a solid foundation from which to overcome any upcoming struggles.

And don't forget the 2.5% dividend. That doesn't hurt either.

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

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