Buy, Sell, Or Hold Best Buy At $74?

Best Buy’s (NYSE: BBY) stock declined almost 15% from $87 levels at the beginning of this year to $74 levels (as of May 4th), compared to a 13% decline for the broader S&P 500. While Best Buy has underperformed the broader markets, we believe there is still modest upside potential from the current levels. We believe consumers could eventually get back to spending big on technology products in the second half of 2020, including new video game consoles, streaming devices, and 5G smartphones. Best Buy’s stock jumped 8% since the end of fiscal 2018 (year ending January 2018), a little over two years ago, as compared to a 3% growth for S&P 500. Our dashboard, ‘What Factors Drove 8% Change In Best Buy Between FY 2018 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

The stock price gain over the past two years can primarily be attributed to modest revenue and strong earnings growth for the company. Best Buy’s revenues were up 3.5% from $42.2 billion in fiscal 2018 to $43.6 billion in fiscal 2020. This combined with an almost 49% jump in net income margin from 2.4% in fiscal 2018 to 3.5% in fiscal 2020, helped earnings per share grow 75%.

However, a 30% decline in Best Buy’s P/E multiple hurt the company’s stock price growth. Best Buy’s P/E multiple declined from 20x at the end of FY 2018 to 14x by the end of fiscal 2020. Moreover, BBY’s P/E is down to about 12.x now, given the volatility of the current situation. This reflects an 11% decrease in P/E multiple since January 2020. We believe there is a potential upside for BBY’s multiple when compared to levels seen over recent periods – P/E of 14x at the end of FY 2020, and 20x at the end of FY 2018.

The reason for BBY’s stock outperformance over recent years can be attributed to the company executing its turnaround plan called “Renew Blue.”  The retailer has been executing on its strategy to cut costs, optimize square footage, grow online sales, and stabilize its revenue stream. The company returned to real growth in fiscal 2018, with revenue growth of 7% y-o-y. This growth followed largely flattish revenue growth in previous fiscal years.

How Is Coronavirus Impacting Best Buy’s Stock?

The outbreak of coronavirus has had a negative effect on Best Buy’s inventory, as it is heavily dependent on China for its production. The factory shutdowns and delays from China led the company’s stock to fall lower in the early weeks of March. However, Best Buy’s stock price gained momentum soon after as the company saw a surge in its sales. Most of the people were transitioning to working from home using workspaces that are often far less equipped than the typical offices. This led to growth in sales of products such as batteries, PCs, laptops, LCDs, printers, and Apple adapters. In fact, consumers under lock-down conditions were also buying Refrigerators and Freezers for stocking up food in large quantities.

Nevertheless, Best Buy’s sales declined as the company temporarily closed stores and stay-at-home orders took effect in much of the U.S. Consequently, the company converted to a curbside-pickup model and suspended all in-home services. Although it witnessed a spike in its online sales since then, the company now plans to gradually reopen 200 of its 1,000 U.S. stores with in-store consultations by appointment.

Between January 31st and May 4th, Best Buy’s stock has lost 12% (vs. about a 12% decline in the S&P 500). A bulk of the decline in the stock markets came after March 6th, when an increasing number of Coronavirus cases outside China fueled concerns of a global economic slowdown. Matters were only made worse by fears of a price war in the oil industry triggered by an increase in oil production by Saudi Arabia.

Going by historical trends and our valuation dashboard, we believe that the company’s stock could potentially offer a modest upside return.

Also see: How Did Best Buy Stock Fare During 2007-08 crisis as Compared to Coronavirus Crisis

In addition, our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams