Which Stocks Can Offer Better Returns Compared To Best Buy?

We believe that there are two specialty retail stocks that are currently better valued than Best Buy (NYSE: BBY). BBY’s current price to operating income ratio (P/EBIT) of 29x is much higher than levels of under 20x for Lithia Motors (LAD) and Lowe’s (LOW). Does this gap in valuation between BBY and its peers make sense? We don’t think so, especially if we look at the fundamentals of these companies. More specifically, we arrive at our conclusion by looking at historical trends in revenues, operating income, and the P/EBIT ratio for these companies. Our dashboard Better Bet Than BBY Stock: Pay Less To Get More From LAD, LOW has more details – parts of which are summarized below.

1. Revenue Growth

BBY’s revenue grew at an average rate of 3.9% over the last three years, as compared to revenue growth of 9.3% for Lithia Motors and 9.8% growth for Lowe’s. Even if we look at the revenue growth over the last year, BBY’s growth of 8% is much worse than 24% growth for Lowe’s. However, Lithia Motors saw only a 3.6% growth during this period.

• Best Buy is a specialty retailer of consumer electronics, home-office products, entertainment software, appliances and related services. The strong housing market has inspired consumers to invest in technology. The company’s comparable sales metrics grew 37.2% rather than growing 17.1% for the Q1 as the market expected, due to sales growth across almost all categories, with the largest gains in home theater, computing, and appliances. The retailer raised its forecast for the year after seeing demand continue into the second quarter. However, the company also anticipates customers to step up spending in other areas, such as travel and dining out, in the second half of the year.
• Lithia Motors is a major player in the car dealership space – selling new, used, imported, and luxury vehicles. The company’s revenues grew 3.6% y-o-y in 2020, due to increased sales of used cars offset by a decline in demand for new vehicles. The company’s results mirrored outperformance largely across the board in Q1 as well. It saw the highest adjusted first-quarter earnings in company history at $5.89 per share, a 193% increase over last year, and a record revenue growth of 55% y-o-y.
• Lowe’s is the world’s second-largest home-improvement retailer, after Home Depot – and it gained from the rise in spending during the pandemic. Lowe’s saw record sales growth in 2020 as it added over $17 billion year-over-year to its sales base and booked soaring profits through the year. By the look of things, consumers are still investing in their homes even after the easing of stay-at home restrictions – as the company saw sales pick up among home professionals in Q1 as well. The retailer’s first-quarter same-store sales surged 30% and sales rose 24% year-over-year to $24.4 billion. The retailer’s earnings grew to $3.21 a share from $1.76 per share a year earlier.

2. Operating Income Growth

The three-year average operating income growth for BBY stood at 9%, much lower than 19% for Lithia Motors and 22% for Lowe’s. Better revenue growth for the latter two led to higher operating income for these companies. Looking at the last year period, BBY’s 19% rise in operating income compares with 41%, and 38% for Lithia Motors and Lowe’s, respectively.

The Net of It All

Although BBY’s revenue base is much larger than Lithia Motors, but smaller than Lowe’s, both of these companies have seen higher growth in revenues and operating income than BBY in the last three years. Yet, they appear to be significantly cheaper than BBY. Despite better profit and revenue growth, these companies have a comparatively lower P/EBIT ratio.

BBY’s underperformance in revenue and operating income growth compared to these peers reinforces our conclusion that the stock is expensive compared to its peers, and we think this gap in valuation will eventually narrow over time to favor the group of comparatively less expensive names. As such, we believe that Lithia Motors and Lowe’s are currently better buying opportunities compared to BBY.

E-commerce is eating into retail sales, but this might be an investment opportunity. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.

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