Best Buy's Credit Risk Overstated

Aug. 17, 2016 2:27 PM ETBest Buy Co., Inc. (BBY)1 Comment
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  • Moody’s is overstating Best Buy’s credit risk with their lower medium investment grade Baa1 credit rating.
  • Credit markets are also overstating credit risk with a CDS of 194bps and cash bond YTW of 3.110%.
  • However, fundamental analysis highlights the firm’s strong cash flows, substantial liquidity and robust recovery rate.
  • These factors drive our two notch higher IG3 (A2) credit rating and 100+bps safer Intrinsic market spreads.

Moody's is overstating Best Buy Co., Inc.'s (NYSE:BBY) credit risk with its Baa1 rating. Our fundamental analysis highlights a safer credit profile for BBY, whose strong cash flows consistently exceed all operating obligations. While cash flows would slightly fall short in 2021, their substantial liquidity would allow them to overcome this with ease. We therefore rate BBY two notches higher at an IG3 (equivalent to Baa1) credit rating. (To register for free access to our corporate credit ratings, please click here.)

Additionally, cash bond markets are overstating the firm's credit risk with a CDS at 194bps relative to an Intrinsic CDS of 77bps, and a cash bond YTW of 3.110% relative to an Intrinsic YTW of 1.910%.

Cash Flow Profile

We produced a Credit Cash Flow Prime™ chart for Best Buy, as we do for every company we evaluate. The chart provides a far more comprehensive view of credit fundamentals than traditional ratio-based analyses. It shows the cash flow generation and cash obligations related to the credit of the firm, adjusted for non-cash financial statement reporting distortions from GAAP. The blue line indicates the gross cash earnings (Valens' scrubbed cash flow number) expected to be generated based on consensus analyst estimates and Valens Research's own in-house research team. The blue dots above that line include the cash available at that time while the blue triangles indicate that same amount plus any existing, available lines of credit.

The colored, stacked bars show the cash obligations of the firm in each year forecast. The most difficult obligations to avoid are at the bottom of each stack, such as interest expense. The obligations with more flexibility to defer year to year, such as pension contributions and maintenance capital expenditures, are at the top of the stacked bars. All of the calculations are adjusted for non-cash distortions that are inherent in

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Valens Securities is a boutique research firm with 90+ professionals, housing truly unique, disciplined, and unbiased research systems for equity analysis, corporate credit, and macroeconomic strategy.Valens provides institutional investor clients with various tools designed for each level of the investment process.Sign up for our daily newsletter hereAssociated Accounts: Valens Research provides data to SA contributor Altimetry

Disclosure: I am/we are long BBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Officers of Valens Securities and/or Valens Credit have positions in securities of Best Buy Co., Inc. (BBY) as of the date of this report.

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