Best Buy Stock Now Yields 5% And Is Too Cheap To Ignore (NYSE:BBY)

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There are two sides to every coin and with market downturns come opportunity for value investors to come out of the woodworks. Many well-respected money managers view current market conditions as a buying opportunity to take advantage of depressed prices and high dividend yields.

This brings me to Best Buy (NYSE:BBY), which is now trading at a price point that was probably unimaginable just 7 months ago, when it hit a high of $142. This article highlights what makes now a solid buying opportunity for high income, so let’s get started.

Why BBY?

Best Buy is America’s largest pure-play retailer of consumer electronics. It’s also considered by many to be a “last man standing”, after other pure play electronics stores closed up shop, including Circuit City and more recently, regional players such as Fry’s Electronics.

While many analysts once thought that BBY would share the same fate as its competitors, it’s proven its ability to adapt to an increasingly e-commerce driven landscape by the likes of Amazon (AMZN). This includes Best Buy’s price match guarantees and omnichannel capabilities, with a robust online platform and pick-up in store feature, which drives increased foot traffic and sales.

In addition, BBY has effectively transitioned its business model to become more services oriented and generates additional revenue by leveraging its stores as effective showrooms for leading product manufacturers such as Apple (AAPL).

Best Buy was an early pandemic winner, as consumers bought up electronics to enable work and play from home. This changed this year, however, as demand inevitably waned and workers returned to the office. This was reflected by the 8% sales decline that BBY saw during the first quarter, and management has guided for a 4.5% sales decline at the midpoint for full year 2022. It’s worth noting however, that BBY’s first quarter sales were still up by an impressive 16% on a 2-year stacked basis.

Meanwhile, The year-on-year decline in revenues combined with concerns around cost inflation and supply chain disruptions has driven the stock price down to levels not seen since the first months of the pandemic. At present, BBY is now trading well below its 200 and 50 day moving averages of $98 and $83, as shown below.

BBY stock technicals

BBY Stock Technicals (StockCharts)

I see this as being an overreaction by the market, considering the underlying strengths of the business. This is considering the aforementioned double-digit sales growth on a 2 year stacked basis, and 80 basis points increase in adjusted operating margin over the same period.

Looking ahead, I see reasons to be optimistic around BBY’s business despite the near-term drawdown in sales, as management has expressed continued willingness to evolve the business model. This is reflected by anticipated expansion in Totaltech memberships and BBY’s foray into the health and beauty businesses, as noted by management during the recent conference call:

We also just recently announced further expansion into the health and beauty category by launching new skincare technology products online and in 300 of our stores. In our Best Buy Health business, we are pleased with our first quarter momentum.

In our Emerging Virtual Care business, we connect patients with their physicians to enable care at home. Last November, we acquired Current Health, a technology company with an FDA-cleared monitoring platform for care at home to help us accelerate our strategy.

The combination of Current Health offerings and our scale, presence and Geek Squad in-home capabilities is already resonating with the healthcare industry. Boosted by its affiliation with Best Buy, Current Health had its best commercial booking quarter ever, including expansion of its relationships with health systems such as Mount Sinai Health System, Parkland Health, as well as the UK National Health Service and others.

Meanwhile, BBY maintains a strong BBB+ rated balance sheet, and the recent share price weakness has pushed the blended PE down to just 7.4, sitting well below its normal PE of 12.0 over the past decade.

BBY stock valuation

BBY Valuation (FAST Graphs)

This has also pushed the dividend yield to 5.0%, and it remains well covered by a 34% payout ratio. Notably, BBY’s dividend has an 8-year growth streak and a 20.6% 5-year CAGR.

Analysts expect BBY to resume double-digit EPS growth starting in the latter part of this year, and have a consensus Buy rating with an average price target of $91.48. This translates to a potential one-year 36% total return including dividends.

Investor Takeaway

In conclusion, I believe that the recent sell-off in Best Buy’s shares represents an attractive buying opportunity. The company is well-positioned to capitalize on the structural tailwinds of e-commerce, and its management team has demonstrated a willingness to evolve the business model to meet changing consumer trends. Given the healthy dividend yield and attractive valuation, I see Best Buy as being a compelling long-term investment at present.

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