Will the Gains Continue For Best Buy Stock?

by Trefis Team
+20.60%
Upside
106
Market
128
Trefis
BBY
Best Buy
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Best Buy (NYSE: BBY), a specialty retailer of consumer electronics, home-office products, entertainment software, appliances, and related services, has more than doubled from the March 2020 lows of around $52 (when broader markets made a bottom due to the spread of Covid-19) to $122 currently. In fact, the company’s stock is now 36% higher than its pre-pandemic high of roughly $90 (Feb 2020). Now, are further gains likely for BBY? We think that the company remains overvalued at a forward price-to-earnings ratio of around 18x, and could likely see a modest downward correction based on its historical multiples in the long term. Going by our Best Buy’s Valuation, with an EPS estimate of around $7.38 and P/E multiple of 16.0x in fiscal 2021, this translates into a price of around $118, which is 4% lower than the current market price.

Best Buy benefited from remote work and online school trends during the pandemic with the growth in sales of products such as batteries, PCs, laptops, LCDs, printers, and refrigerators. While this technology demand could likely extend into the fiscal first quarter, we believe that it will likely become lackluster after the pandemic – as people will prefer to spend their disposable income on vacations and dining out. The electronics retailer’s best guess is that it will hold same-store sales roughly even this year (between -2% to +1%). Best Buy’s stock has largely outperformed the broader market with a 107% jump since the end of fiscal 2019 (year ending January 2019), compared to a 59% growth in S&P stock. Our dashboard, ‘What Factors Drove 107% Change In Best Buy Between FY 2019 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 strong revenue and earnings growth for the company. Best Buy’s revenues were up 10.5% from $42.9 billion in fiscal 2019 to $47.3 billion in fiscal 2021 (year ended January 2021). This, combined with an almost 11% jump in net income margin from 3.4% in fiscal 2019 to 3.8% in fiscal 2021, helped earnings per share grow 31%. Finally, Best Buy’s P/E multiple grew from 11x at the end of FY 2019 to around 16x by the end of fiscal 2021 (year ended Jan 2021). While the company’s P/E is about 18x now, there is a downside risk when the current P/E multiple is compared to levels seen in the past year.

The reason for BBY’s stock outperformance over recent years, even before the tailwinds from the pandemic – can be attributed to the company executing its turnaround plan called “Renew Blue.” The retailer has been executing its strategy to cut costs, optimize square footage, grow online sales, and stabilize its revenue stream. The company returned to real growth only 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?

In fiscal 2021, Best Buy’s total revenue grew 8% year-over-year (y-o-y) on a 9.7% increase in comparable sales, even with lower advertising spending and a much smaller workforce. The retailer’s total operating expenses declined marginally, due to store closures in the fiscal first half and stores functioning as an appointment-only store after reopening for the first six weeks of Q2. This enabled Best Buy to grow its operating margin by 50 basis points y-o-y to 5.1%, driving a 19% surge in earnings per share to $6.84 during this period. Notably, domestic online sales grew by a large 144%, growing to 43% of the domestic sales mix from 19% a year ago. Consequently, Best Buy was able to drive consumers to purchase electronics online without losing customers to e-commerce giant Amazon.

Best Buy is also piloting a new membership plan called Best Buy Beta in select stores currently, which will offer free shipping with no minimum order. The pilot will eventually encompass 60 stores, extend its return window to 60 days, and also offer two-year warranty protection on most purchases.

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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