Best Buy - A small bet on Best Buy (BBY)

[HWWProject]

Hi all - I'm not finding many value stocks to purchase here in the US but thought I'd share my most recent:

I purchased Best Buy (BBY) last month (Feb. 26th) at $32.30 per share. Best Buy is the largest consumer electronics outlet in the world. The company operates more than 1,400 stores throughout the US and Canada, and another 2,600 stores in Europe and China, mostly under the Best Buy, Best Buy Mobile, and The Car Phone Warehouse banners.

Best Buy is suffering from the threat of Wal-mart's further expansion into electronics, as well as online competition. Due to these, Best Buy stock is selling near its 52-week low. It is priced as if it has no growth in its future, yet I have to believe there's room for more than just Wal-Mart in this space.

Some numbers on the stock:

price to peak earnings = 8
Free Cash Flow yield =12%
dividend yield = 1.77%
Return on Capital = 21%

This was a very tough decision to purchase for the following reasons:
1) The threat from Wal-mart and online competition may be real.
2) People are buying fewer movies and music from stores thanks to Netflix /Itunes.
3) Best Buy has a lower profit margin of 4%, I generally want a minimum of 5%

After reading the above I wonder if I made a good purchase. I believe BBY is priced as if no growth is in its future, but I find that hard to believe. Much of BBY's growth is in Asia, so I'd be interested in the thoughts from this board.

My calcs tell me Best Buy is selling at a 35% discount to my estimate of Intrinsic Value.

[Musicwhiz]

Thanks for sharing your analysis. I have yet to find time to start looking at US Companies....haha.

[corydorus]

I understand that BBY operates in a competitive environment despite having a large market share.
CircuitCity went bust if i remember correctly.


Cory

[HWWProject]

Best Buy benefited from Circuit City's bankruptcy, but I agree the competition is fierce in this industry. A main concern for me is that music and video sales remain a large portion of BBY's revenue, yet there is a downward trend in CD/video sales due to online availability.

Best Buy doubled their annual Free Cash Flow over the last 8 years. I'm trying to convince myself that their is still growth ahead for them.

[weijian]

Me included thought Best Buy wouldn't survive in its current form (the scale and format of stores). On hindsight, an (ex-McKinsey) outsider actually made the necessary moves to survive and then strive - matching competitors, partnering with them and then offer new services to make a difference. The downsizing from 4 to 3 offices to cut costs, but yet resuming the employee purchase discount was a statement.

Best Buy Should Be Dead, But It’s Thriving in the Age of Amazon: “Everyone thought we were going to die”

https://www.bloomberg.com/news/features/...-of-amazon

[Big Toe]

Very good bloomberg article. Enjoyed it very much.
Best Buy played on its strength and worked closely with the best/hottest brand as well as its bitter enemy.
Very much reminded me of Hai Di Lao steamboat chain. It is still a steamboat chain but it offered un-matched level of service.

Brings about another question, what if the entire industry is in the brink of collapse? The electronics retail is still a viable business no matter how hash or competitive it has become. Consumers will need to buy and replace their home appliances and electronics. But what if an industry has nearly all players losing money and in permanent decline?