InvestingDaily.com

Account Information

  • My Account

    Manage all your subscriptions, update your address, email preferences and change your password.

  • Help Center

    Get answers to common service questions, ask the analyst or contact our customer service department.

  • My Stock Talk Profile

    Update your stock talk name and/or picture.



Close
FEATURED STRATEGY

This Two-Minute Market Move Could Make You Rich

This Two-Minute Market Move Could Make You Rich[Revealed] How to generate instant income from the stock market. Over and over again. At will. This technique is so powerful – and safe – we’re guaranteeing you can use it to generate $1 million (or more) in retirement cash. And we’ll even send you a $1,000 check to kickstart your journey. Go here for details.

 

Best Buy? Not So Much

By Linda McDonough on November 22, 2016

Best Buy’s stock isn’t the best buy right now. In fact, I’d be more inclined to sell the stock than buy it after reviewing its recent quarter. With a rousing 14% rally greeting its third quarter earnings release I was eager to learn about how the company managed to be one of the few retailers to escape the clutches of Amazon.

Earnings skyrocketed an incredible 50% to 62c and are expected to jump 20% in the fourth quarter, a number that would have been higher if not for the Galaxy Note 7 recall, which has left some potential mobile customers waiting for a better, large-screen mobile phone.

Imagine my surprise when reading that Best Buy’s sales inched up just 1.4% and are flat for the first nine months of the year. Online sales, a category boosted by the company’s free two-day shipping, catapulted 24% but represents just 10% of total revenue, too little to move the needle on overall growth. Revenue for the critical fourth quarter, which makes up 35% of annual sales, is expected to decline slightly.

It appears that while Best Buy has been able to keep its head above the tsunami of Amazon, it was not making much progress bringing new customers to its stores.

I continued to dig on, searching for the catalyst that ignited Best Buy’s remarkable earnings growth. Gross profit margins were not responsible. These margins, which represent the profit left after deducting store expenses and the cost to purchase merchandise, rose a meager 4%. Certainly no double digit jumps in profits being driven by this line item.

The company did make some decent strides in controlling its SGA (sales, general and administrative) expenses. It has been diligent in the past two quarters in its hiring practices. In addition, vendors like AT&T and Verizon have set up mini-stores within its stores, staffing them with their own employees, lessening the load on Best Buy.

These expenses did not increase from last year’s third quarter which drove a big jump in the company’s operating profits. Typically administrative expenses rise in lock step with revenue which dilutes the earnings growth. This is just the second quarter that Best Buy has shown the ability to control SG&A, a positive omen for at least a few more quarters. I’ll give the company a gold star for discipline in spending in the face of tepid sales but I’m not convinced it will be enough to increase earnings growth.

When moving down the income statement I was surprised to see that almost half of Best Buy’s earnings improvement came from a combination of lower interest expense, a lower tax rate and a drop in shares outstanding. While all of these are perfectly legal and important drivers of earnings growth, they are less likely to fuel a longer tail of earnings growth.

Certainly a drop in interest expense is impressive. This expense dropped 20% due to a one time debt repayment in this year’s first quarter. This lower expense will continue to boost earnings for the next two quarters. After that the company would have to pay off another lump of debt or refinance at a lower interest rate to lower this expense.

The company has some leeway with its share buyback program to further boost earnings. Last February it announced a $1 billion buyback. To date it has used up a bit more than half of that. At current prices, the remaining $480 million could buy 10.5 million shares, which could increase earnings per share by 3%. Again, this is helpful but not enough to justify higher prices in the stock.

All of the analysis above would be a moot point if the stock offered a terrific value. However Best Buy now sells for a PE of 13 times its 2018 estimate, when earnings are expected to increase just 5%. It’s certainly possible that Best Buy’s revenue catches some momentum and fuels more investor enthusiasm but with the stock up 52% year to date, it looks like there are better buys in the market.

I’ve made several successful bearish bets for subscribers of Profit Catalyst. Best Buy is now officially in my inventory bin and I’ll be looking for the right spots to make some trades on it.


You might also enjoy…

 

Boost Your Annual Income By As Much As $12,036

We’ve uncovered a unique income-boosting opportunity that allows you to collect up to $1,003 a month in extra government cash. 

This plan is available to everyone over the age of 18.

The amount you make isn’t dependent upon your marital status…

How much money you currently make…

Or even how much money you made in the past.

Best of all, because of the way Uncle Sam views the money that comes from this plan, your current—or future—Social Security benefits won’t be affected, either. 

There’s still time to get your name on the list for the next check run. 

I’ll show you how here.

Stock Talk — Post a comment Comment Guidelines

Our Stock Talk section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a general investment comment not related to this article, please post to our Stock Talk page. If you have a personal question about your subscription or need technical help, please contact our customer service team. And if you have any success stories to share with our analysts, they’re always happy to hear them. Note that we may use your kind words in our promotional materials. Thank you.

You must be logged in to post to Stock Talk OR create an account.

Create a new Investing Daily account

  • - OR -

* Investing Daily will use any information you provide in a manner consistent with our Privacy Policy. Your email address is used for account verification and will remain private.