Best Buy Stock Close to its Intrinsic Value

Barron’s analyst Jonathan R. Laing recently issued a bullish forecast for Best Buy (NYSE:BBY). The consumer electronics retailer’s stock dipped around the middle of 2010 but has recovered in the past few weeks to a current level of just under $40.

Laing argues that Best Buy’s stock could reach $50 in the next year: “For one thing, its stock remains cheap,” he writes. “For another, it’s superb at exploiting new products like iPads and smartphones and for adding to its market share, despite brutal competition from discounters like Wal-Mart (WMT) and Costco (COST) and Internet players like  Amazon (AMZN), via superior service and selection.”

We have maintained our price estimate for Best Buy consistently above $40, and we believe that the stock is currently close to its intrinsic value. For the stock to reach $50, Best Buy’s gross profit margins and revenue per square foot would both need to grow sharply over the next year. Our analysis follows below.

Mobile sales drive margin growth

We expect that Best Buy will continue to grab market share  and improve its revenue per square foot (an important retail metric) from U.S. stores. We expect gross profit margins to rise this year, mainly driven by the growth of Best Buy’s mobile business. Our current $40.88 price estimate reflects these assumptions. You can drag the trend-lines in the charts below to create your own revenue per square foot and gross margin forecasts for Best Buy and see how they impact the company’s stock.

As the U.S. holiday season approaches, we expect mobile sales to decline as a proportion of total sales, because sales of other electronic products will likely increase. This would tend to reduce the growth rate of Best Buy’s profit margins, putting downward pressure on the stock. On the other hand, the stock could rise if Best Buy’s mobile business continues to boost the company’s overall profit margins next year.

You can see the complete $40.88 Trefis price estimate for Best Buy’s stock here.