Streetwise for Friday, July 21, 2017
Today’s discussion revolves around Best Buy (BBY), the go-to-place if you need a new computer, television or cell phone. Hey, what about Amazon? Not if you want a defective item replaced on the spot. In the case of a large television, you may also want it mounted on a wall and if necessary serviced in your home. Best Buy’s Geek Squad fills the bill.
When I last wrote about Best Buy a year ago, my earnings estimate for fiscal 2017 (Best Buy’s fiscal year ends on January 31) was $2.85 per share with a 12-month projected share price of $38.40, for a 15 percent capital gain. So how did the company do? Fiscal 2017 earnings came in at $3.56 per share, and the shares recently closed at $56.24.
For years, Best Buy has been perceived as a relic of the retail sector, the last vestige of a bygone era. Unable to defend itself against the effects of showrooming, (customers going to brick and mortar showrooms to look with the idea of buying it online for less), it was said you could almost hear the death rattle. Many of us believed otherwise.
When Hubert Joly was appointed to head up Best Buy in 2012, Wall Street’s naysayers complained about his lack of retail experience and sent Best Buy’s shares down 10 percent. Some on Wall Street referred to him as the Rodney Dangerfield of retail because he, ìgot no respect.î
Joly took aim at showrooming by matching prices, particularly those of Amazon. Nonetheless, Wall Street was confident that their initial lack of confidence in Joly would play out correctly. How wrong they were.
Best Buy has more than held its own in one of retailís toughest markets, one that has claimed smaller rivals such as Circuit City and HHGregg. The retail giant has been profitable for four-straight fiscal years and it has managed to keep sales little changed over the last five years.
Although flat sales are usually unsatisfactory, in Best Buyís world of cutthroat competition, it is acceptable. Over time, the Street has come to appreciate Joly’s style and have sent shares of the retailer up more than 190 percent since 2012. However, it seems there will never be an end to the concerns that like the dinosaurs, extinction will come to Best Buy.
For example, the company’s shares were hit recently amid reports that Amazon was preparing to create a rival service to the company’s Geek Squad. It was an overreaction. Amazon’s service will only be available in seven locations and it will only focus on Amazon’s own devices.
Meanwhile, the Geek Squad will install or repair without regard to where an item was purchased. And Geek Squad services are available at more than 1,000 Best Buy locations.
Could Amazon ramp up to the degree that they are a threat to Best Buy? Given Amazonís financial resources, anything is possible; but not necessarily probable. One thing blocking Amazon is that the price differential in consumer electronics is no longer an issue.
Bank of America Merrill Lynch stated that Amazon would have a limited impact on Best Buy. Loop Capital notes that Best Buy’s Geek Squad has a much broader set of services and thinks it could take years for Amazon to compete at scale. Moreover, Geek Squad revenue is only 3 percent of Best Buy’s sales.
Going forward, Best Buy is introducing smart home products designed to assist with the caregiving duties of adult children monitoring their aging parents. The service will be introduced in the Minneapolis-St. Paul region initially.
The personalized caretaking concept allows users to automate many household functions and set up alerts based on motion sensors and cameras. It is another example of Best Buy taking advantage of the connected home space through its Geek Squad.
Best Buy offers a healthy indicated dividend yield of 2.24 percent and the dividend payout ratio of 32.33 percent is an excellent indicator of the cash flow being generated.
The intrinsic value of the shares using the ValuePro.net conservative free cash flow to the firm model produces an intrinsic value of $61.64 per share. My earnings estimate for the coming fiscal year is $3.85 per share with a 12-month projected share price of $62, for a 10 percent capital gain.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.
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