Best Buy (NYSE:BBY) has gained great momentum lately, after its recent earnings release. To be sure, the stock jumped 18% on the day it announced its fiscal Q2 results. Nevertheless, the stock has been on a roller coaster in the last few years and hence the big question is whether the recent rally is sustainable or investors should stay away from the stock.
First of all, Best Buy managed to arrest the severe issues of declining comparable sales and margins, which it faced during its fiscal 2012-2014. This year is the third in a row that the company is expanding its operating margin while its same-store sales remain positive. Therefore, the turnaround seems to be still in place. Moreover, the company has successfully adjusted to the various business challenges it has faced throughout its 50-year history.
It is also remarkable that the company has reported growth in its comparable sales in its appliances segment for 23 consecutive quarters. In the latest quarter it reported 8.2% comparable sales growth on top of 21% last year. Even better, while its mobile sales have declined in the first half of this year, they are likely to meaningfully rebound in the back half thanks to the launch of iPhone 7. This major tailwind is likely to continue to support the stock price, at least in the short term.
The stock also currently offers an appreciable dividend yield of 2.95%. Moreover, it has an aggressive share repurchase program of $1 B in place, which is scheduled to end in early 2018. This program has reduced the share count by 9% this year and can further reduce it by an additional 8% at the current stock price. The program is particularly efficient thanks to the relatively low P/E ratio of the stock, which currently stands at 12.5. All in all, the company is indisputably generous to its shareholder via its dividend and its share repurchases.
While all the above facts bode well for the stock, investors should not underestimate its great risks. More specifically, Best Buy operates in a commodity-like business, with the price of home appliances following a secular long-term downtrend. Therefore, the company will certainly continue to face great competitive pressures in its business. Even worse, it competes directly against Amazon (NASDAQ:AMZN) and other large retailers, who enjoy significant economies of scale and can squeeze their margins to levels that Best Buy cannot tolerate. It is remarkable that a recent report from Deutsche Bank found that Amazon accounted for 90% of the sales growth of consumer electronics. While Amazon had 6.2% share and ranked No. 4 on the list of top 100 U.S. electronics retailers in 2010, it is now No. 2 with 17.0% share. This certainly does not bode well for Best Buy.
The extensive turnaround in the high levels of the management is another red flag for Best Buy. The exit of the former CEO of the company from the board was announced early this year, while the CFO stepped down in June. As the new managers have a less proven execution record, there is greater uncertainty now than before over the future earnings of the company.
Moreover, no-one should ignore the pronounced volatility in the earnings and the stock price. More specifically, numerous analysts dramatically revised their ratings and their estimates downwards for the company after its fiscal Q1 results earlier this year. The opposite was observed after the latest earnings release, when numerous analysts revised their ratings upwards. When even the experts have absolutely no clue on the outlook of the stock, individual investors cannot have a clear outlook either. Therefore, investors should realize that Best Buy is an extremely volatile stock, with very uncertain outlook. This is also evident from the chart of the stock, which has experienced a roller coaster from $40 to $25 and then back to $40 only in the last 12 months.
When a stock has such low visibility, investors should certainly put the attractive dividend on the back burner. A high dividend should be viewed as attractive only when it is safe and is even likely to grow in the future. When the growth prospects are so uncertain, investors should not be enticed by the dividend. Otherwise, they are likely to face a really negative surprise in the future, when their capital losses will more than offset their dividends.
To sum up, when a stock has such volatile earnings and price, investors should be cautious, particularly after a spectacular rally. For one thing, they should definitely not base their investing decision on the dividend of the stock. Best Buy may continue to rally this year thanks to its execution and the launch of iPhone 7. On the other hand, this is a commodity-like business with fierce competition from Amazon and other large retailers. Even the analysts have proved incapable of predicting the earnings of this company. Therefore, Best Buy is a highly unpredictable stock, with great downside potential whenever it faces the first unforeseen headwind.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.