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| Image: Best Buy |
Some explanations of my investing method is due. My inclination is towards value investing, though hardcore value investors would say that I deviate from it. I won't touch a stock unless I figure that there is a 20% safety margin (i.e. the target price is 20% higher than my entry point). I maintain a satellite portfolio of a maximum of 10 stocks, of which I would sell the weakest holding when I find a good 11th candidate. This helps me take money off the table and also creates a certain discipline.
Click read more to find my analysis. I have published it without embellishments from the time I wrote it, and would update it when I review the company. I only removed the size of my position.
Disclosure: I have direct holdings in BBY and WMT, but not in AMZN.
Best Buy(NYSE: BBY)
15 Dec 10
BBY FY10 ends 26Feb10
P=35.27
EPS_11f=3.2-3.4 [source: 3q guidance]
EPS_ttm=3.32
PER_11f=10.37-11.02x
BBY had a 15% decline overnight on disappointing Q3 results, which brought its shares now to cheap valuations. Its 2011 PER range so far is 9.66x-15.3x
Its historical PER range is from 7-28x (2002 to now) and averages 17.72. This implies TP=56.704 or a 60% upside but this is probably overly optimistic as the weak macro environment relating to unemployment has caused BBY to trade at weak valuations.
BBY international ops is limited to Canada, China, Mexico, Europe and Turkey, where it had acquired market share by acquiring chain electronics stores and it has no further plans for international expansion. In its domestic ops, it also has a history of acquisitions, mainly into new product ranges like Napster and adjacent services like Magnolia (hi end audio and video), Geek Squad (repair and installation), Pacific Sales Kitchen and Bath, and mobile etc. About 25% of revenues comes from its intl segment while 75% is domestic in 2010. This has improved from 16% in 2008. However, intl gross margins are extremely low, at 1.32% in 2010. In terms of Op Income contributions, domestic contributes 93% in 2010. This indicates that BBY is almost completely dependent on domestic success. It has also more stores internationally, but its intl performance seems limited in light of the poor margins. This seems to be due to the restructuring charges.
BBY sells discretionary and necessity electronics. It is exposed to wider economic performance as reflected in its beta of 1.46. This in itself is not a bad thing since it means that BBY is also poised to respond favourably in an economic recovery.
FCF: [I previously enclosed my spreadsheets but have removed them. Email me for them]
G=0, FV_2010=40.61, or a 15% upside
G=2%, FV_2010=52.41 or a 48.5% upside.
CFO for ytd or ttm is not available. I had tried to reconstruct the CF but there is insufficient info inside the Q3 report to do so, but it does look like there are similarities to 2010 CFO after putting in the NCC. Generation of FCF is critical for such an operation, since it is a retailer and its solvency depends critically on the ability to generate FCF. Despite the weakness of this season’s earnings, it does not appear at all that the business is in any way impaired. From the FCF calculations, the market is pricing the stock for less than zero growth. Which means it is expecting that further decrease in earnings are going to happen in FY2012. BBY has been a consistent earner based on the last 10 years data, except for 2009. In 2010, earnings returned to 2008 levels and 2011 is expected to exceed this. Actually considering that the 3.20 guidance includes 12 cents of share repurchase, this indicates actual earnings have practically flatlined. Which also explains the negative growth rate being priced into the share, which I compute as -1.5%.
A key question is really about market share. I was in my mind thinking, is BBY going to go the way of tower records for example. But Tower had a structural change, the same one the music industry is facing, i.e. no one is buying CDs anymore. For electronics, the structural change is, are people just buying things online. And even then BBY has an online presence, but the problem with online is that it is just commodity moving at cheapest prices since information is completely wide open online, and price comparisons between retailers are easy to find.
While I don’t think that brick and mortar retail businesses are going to go away, there is certainly more competition today from online discount operators. I want to further analyse the comparables metric and understand whether it is a shrinking thing or can BBY leverage going forward and its growth proposition.
The comparables did show that the consumer electronics is going down, with home office rising. But it isn’t an indicator of market share. What is crucially important for BBY is the generation of FCF through increasing revenues, and revenue growth has not been disappointing though it might be slow. BBY’s shareprice is likely to keep falling, which creates opportunity for purchase. The retail picture is not working out to be bad, in fact Black Friday was great for other retailers except for BBY. The fact that a lot of their products are discretionary is where the difficulty arises for BBY especially in a weak economic environment.
Liquidity:
Current ratio = current assets/current liability = 14829/13420=1.105
Current ratio = current assets/current liability = 14829/13420=1.105
Quick ratio = cash+short term marketables+recievables/current liab=(925+2+2793)/13420=0.277
Cash ratio= cash+short term marketable investments/current liab=(925+2)/14320=0.065
Most of the current assets are tied up in inventory, just like most of the current liability is in accounts payables. In terms of solvency, it does face large repayments in 2012 and 2013, but these can be met by cash since it has a lot of cash of its balance sheet. Nonetheless, it must find refinancing. But its FCF yield at 10% is comfortable and its LTD to total cap at about 20% is also not uncomfortable.
Conclusion: FCF at g=0 indicates FV=40.61, and a 20% margin indicates entry price=33.84. The FV is also the view held by other sell-side research indicating about 41. The long term growth prospects are not poor though not blazing. Near term weakness indicates that there can be favourable entry points for the stock.
24Mar11
P=30.71
BBY is looking increasingly more attractive, as it tests new 52 week lows. It released 4q results today and it was up initially 3% though it is now down almost 4% for the day. I did a price check of BBY’s website vs Amazon, and some products are cheaper on BBY while some are cheaper on amazon. Which means it is not a complete dominance. Amazon had begun selling electronics early on in its life, it was not as if it only happened recently. And BBY had survived through it. While its same store comps have deteriorated, 2010 was a good year for it, which also explained why this year’s comparables were tough.
EPS_11=3.08
PER_11=9.97x
EPS_12f=3.28-3.53
PER_12f=8.7-9.4x
I think BBY is trading at really low valuations.
ROCE=EBIT/TBV=(2078+87)/(7292-2454-133-203)=48%
Earnings yield=EBIT/EV
EV=MV_debt+MV_equity=557+441+711+406.1*30.71=14180.33
EY=(2078+87)/ 14180.33=15.3%
ROE=1277/7292=17.5% which is a decline from previous year’s above 20% ROE.
BBY should emerge on greenblatt’s list (Greenblatt wrote the Little Book that Still Beats the Market) soon, with such outstanding metrics. It is just too bad that I don’t have BBY’s CFO info. I had reworked 2010’s data using my higher discount rates of RFR=4.7 and MRP=6.5, and FV_10=32.52, and that’s TP=27.1 discounting 20%.
Its earnings are also consistent over the past years increasing almost linearly upwards except in 2009 and now in 2011. Its RR is high, but its dividend is not always increasing, with a low yield of 1.4% for 2011.
BBY is having a bloodbath tonight, what I want to do is read the conference call transcript and then decide what to do. The question really is, is BBY getting increasingly attractive as the price falls, or is it well deserved. This is what BBY has to say concerning the market share question: market share in my opinion is not seasonal, so I suppose it is steady but the para is unfortunately not very revealing.
The company estimates that for the three months ended January 31, 2011, its domestic market share improved slightly on a sequential basis from the three months ended October 31, 2010 but declined versus the prior year given competitive promotional activity early in the holiday season and the high market share levels experienced in the comparable period last year. The company noted that given the limited availability of external market data, its share estimates reflect only traditional consumer electronics hardware categories and exclude many categories where the company estimates it gained share and that are important to the company’s growth and profitability, such as mobile phones, tablets, connections and services.
25Mar11
Reading the transcript now. More words on market share: The first part of your question, as you mentioned, our market share was sequentially improved from the third quarter to the fourth quarter. The declines we saw are consistent with what we saw in the third quarter. But for the year, in looking at it for the total of the year, last year our share was approximately 22%, again in the categories that we're measuring here, which it’s important to call out our [ph] missing the things that were growing the fastest in cellphones, services, tablets. These aren't in these track numbers yet. But our share this year was down about 100 basis points for the year. We were up 170 last year, so we're still on a sequencing trend positive over a multiyear basis. We have a very strong number one position in television, computing and digital imaging and television. Our share is higher than the next three competitors combined. So in those areas, we're going to really vigorously defend the share in those three positions. The biggest thing we're going to do to grow share is what I mentioned earlier, we have four categories for our shares that are in single digits. Gaming and software, we have probably a little over that, but we have massive area for improvement in mobile, appliances, tablets is just beginning. So these are all areas of -- that's where we see the growth coming from while we maintain and continue to grow a bit the really strong sales positions and share positions we have in the big three.
It’s good to note that they do have quite a strong market share. On a tactical basis, BBY might fall some more. To avoid catching a falling knife, I think I want to monitor and then get in once it stops falling and moves up say, 2%.or even 5%. But let’s see if it keeps falling tonight. The ironic thing is, I would have more confidence in BBY if last night it ended positive instead of down.
28Mar11
P=29.5
The difficult question I didn't answer was so what TP should be. Based on a zero g, 4.7% RFR, FV=32.52. Using 10yr yield instead (at about 3.4?), FV=40.61, a 37% upside.
Using average PER=17.72 and EPS_11=3.08, TP=54.58, an 85% upside.
All methods are abit arbitrary, but still a reasonable PER is about 14x. At 14x, TP=43.12 or a 46% upside.
Dividend=0.6
Divyield=2%
Conclusion: I think in this case, I would adopt a 14x PER as the method to set TP, and revise this based on 2011 CF data, which would appear in their 10k not yet published. TP=43.12.
10Apr11
I had initiated my buy position at P=28.8. Essentially, I had been monitoring for BBY to hit bottom and level off, and was waiting to enter once it reversed its continual fall. I bought in at about 2% from its bottom. BBY’s analyst day is on 14Apr and the information from it should be monitored.
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