Best Buy: Overlooked Retailer Stock Is A Buy (NYSE:BBY)

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Best Buy (NYSE:BBY) is a survivor. The company had survived the transition to e-commerce when other competitors did not. Best Buy has arguably figured out how to become an omnichannel electronics retailer competing with much bigger players like Amazon (AMZN), Walmart (WMT), Target (TGT), and Costco (COST). In addition, the COVID-19 pandemic provided a tailwind for computer, electronics, and home theater sales, although that is now slowing. Consequently, the stock price has been down about (-20%) in the past year and (-7%) year-to-date on slowing sales growth. The stock price is also well off its 52-week high. Simultaneously, the dividend yield has risen, and the valuation multiple has declined. Investors should look at this retailer, Best Buy is often overlooked, but it is a buy.

Overview of Best Buy

Best Buy was founded in 1966. Today, the company is the largest electronics retailer in the US and Canada. The company shuttered its Mexican stores in fiscal 2021. It now has about 938 Best Buy stores and 16 Best Buy Outlet Centers in the US, 21 Pacific Sales Stores, 127 Best Buy stores in Canada, and 33 Best Buy Mobile Stand-Alone Stores in Canada. The retailer also operates an e-commerce store. Total revenue was $51,761 million in fiscal 2022 and the past twelve months.

Best Buy sells computers, mobile phones, televisions, appliances, home theater systems, printers, etc. In addition, the retailer sells installation services through third-party contractors. Best Buy’s Geek Squad provides installation and repair services.

Major brands include Best Buy, Magnolia, Pacific Kitchen, Lively, Yardbird, and Home.

Growth and Earnings

Best Buy continues to grow organically, leveraging its status as the largest pure-play electronics and services retailer in North America. Although Best Buy has large competitors, they mainly sell electronics as a part of a larger number of SKUs and are not focused solely on electronics. Furthermore, their focus is often on low-price.

On the other hand, Best Buy focuses on electronics, appliances, and services, but pricing remains competitive. Instead of pursuing only the low-price business model, Best Buy has developed services and Geek Squad as a differentiator. The company offers installation, repair, removal, and post-sale services not found with the same level of expertise as most competitors. In addition, the Totaltech program offers free extended warranties, free delivery, VIP phone and chat support, and member pricing. Hence, Best Buy has developed a competitive advantage.

The result is that Best Buy dominates brick-and-mortar sales with about 40% market share. It also generates about one-third of sales from the online channel. Reportedly, one in three televisions, laptops, and PCs are sold by Best Buy. In addition, the retailer has a leading position in sales of gaming devices, appliances, headphones, mobile phones, small appliances, cardio machines, phone accessories, and imaging products.

Best Buy overview

Best Buy Investor Relations

Best Buy’s competitive advantage has driven revenue and earnings growth, especially in the past five years. The company was plagued by declining revenue until about 2018. However, Best Buy reversed the trend by transitioning to an omnichannel sales model and emphasizing value-added services. In addition, prioritizing online sales growth, optimizing store count, and extracting cost efficiencies have helped increase margins and earnings per share.

Furthermore, the company experienced a significant tailwind from the COVID-19 pandemic and associated federal stimulus. However, this is slowing, and sales in fiscal 2023 and 2024 may be lower than in FY 2022.

Best Buy revenue trend

Portfolio Insight

Best Buy EPS trend

Portfolio Insight

Risks for Best Buy

Despite Best Buy’s success, it faces significant competition in its market space. The list of electronics retailers is lengthy and includes Amazon, Walmart, Target, Costco, and others. Smaller specialty retailers exist in regional brick-and-mortar stores and online. Many manufacturers like Apple (AAPL), Dell (DELL), and Hewlett-Packard (HPQ) sell directly to consumers online. In addition, Apple sells through its stores.

Many of these competitors have deeper pockets than Best Buy and would likely be able to displace the company as the market leader. Furthermore, a misstep by Best Buy would mean a loss of market share.

Next, Best Buy is experiencing cost pressure through rising labor, supplies, rent, and freight costs.

Dividend Analysis

Best Buy is a Dividend Contender with 19 years of dividend increases. The last dividend increase was 25.7%, with a quarterly dividend rate of $0.88 per share from $0.70 per share. The forward dividend yield is now approximately 3.68%. This value is more than double the average dividend yield of ~1.3% for the S&P 500 Index and the trailing 5-year average of ~2.52%.

The company has paid a dividend since 2003. Best Buy’s dividend has grown at a double-digit rate for the past decade and should continue based on the payout ratio. The trailing 10-year dividend growth rate is 16.27% CAGR, the 5-year dividend growth rate is 20.11% CAGR, and the 3-year dividend growth rate is 15.87% CAGR.

Best Buy dividend growth

Portfolio Insight

The dividend safety is excellent based on earnings, free cash flow, and the balance sheet.

Consensus fiscal 2023 guidance for adjusted earnings per share is $8.84. The forward annual dividend rate is $3.52 per share, giving a payout ratio of around 40%. This value is conservative and below my target value of 65%. The payout ratio value also supports long-term future dividend growth without risking dividend safety.

Additionally, the free cash flow (FCF) more than covers the dividend and meets my threshold of 70%. In fiscal 2022, operating cash flow (OCF) was $3,252 million. FCF was $2,515 million. The dividend required $688 million, giving a dividend-to-FCF ratio of roughly 27%. This percentage is below my target value and is very conservative, meaning there is little risk to the dividend.

Best Buy has a conservative balance sheet and net cash position adding to the dividend safety. At the end of fiscal 2022, the company had $2,936 million in cash and cash equivalents. There was no short-term debt or current long-term debt. Long-term debt was $1,189 million meaning Best Buy has a net cash position. In addition, Best Buy has a BBB+ lower-medium investment-grade credit rating from S&P Global and an Aa3 upper-medium investment-grade credit rating from Moody’s. Hence, debt does not currently pose a risk to the company’s dividend.

Valuation Analysis

The consensus analyst fiscal 2023 earnings are now $8.84 per share. We will use 13X as a reasonable value for earnings multiple. It is slightly below the midpoint of the range in the past decade. We account for slowing sales and rising competition to be conservative.

Our fair value estimate is $114.92. The current stock price is ~$94.40, suggesting that the stock is undervalued based on earnings.

Applying a sensitivity analysis using price-to-earnings (P/E) ratios between 12X and 14X, we obtain a fair value range from $106.08 to $123.76. Thus, the current stock price is ~76% to ~89% of the fair value estimate.

Estimated Current Valuation Based On P/E Ratio

P/E Ratio

12

13

14

Estimated Value

$106.08

$114.92

$123.76

% of Estimated Value at Current Stock Price

89%

82%

76%

Source: dividendpower.org Calculations

How does this compare to other valuation models? An EV / EBITDA multiple analysis from finbox gives a fair value estimate of $130.32 per share. The model assumes a multiple of 7.7X. The Gordon Growth Model is not appropriate since the dividend growth rate is so high. Portfolio Insight’s blended fair value model accounting for the P/E ratio and dividend yield gives a fair value of $125.03 per share.

The average of these three models is ~$123.42, suggesting Best Buy is undervalued at the current price.

Assuming a conservative 6% EPS growth rate over the next 5-years and the same P/E valuation multiple of 13X gives a fair value estimate of about $141.96.

Best Buy is currently trading below its 50-day and 200-day exponential moving averages after declining from its 52-week peak in late November.

BBY stock valuation

Stock Rover

Final Thoughts

Best Buy is a stock that is a deal right now. First, the valuation is now below the mid-point of the past decade, and multiple models show the stock is undervalued. Next, the dividend yield is nearly as high as in April 2020. Finally, the company continues to increase the dividend at a double-digit rate. In addition, Best Buy is a Dividend Contender with 19 years of consecutive dividend growth. There is a lot for investors to like here. I view Best Buy as a long-term buy.

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