Best Buy: The overlooked retailer’s stock is a buy (NYSE: BBY)

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best buy (New York Stock Exchange: BBYA survivor. The company survived the transition to e-commerce when other competitors couldn’t. It can be said that Best Buy has figured out how to become a multi-channel electronics retailer that competes with much larger players like amazon (AMZN) , Walmart (WMT), Goal (TGT) and Costco (recovery). In addition, the COVID-19 pandemic has provided a tailwind for sales of computers, electronics, and home theaters, although this is now slowing. As a result, the stock price has fallen by about (-20%) in the past year and (-7%) YTD due to slower sales growth. The stock price is also a long way from a 52-week high. At the same time, the dividend yield has risen and the valuation multiplier has fallen. Investors should look at this retailer, Best Buy is often overlooked, but it’s a buy.

Best Buy . Overview

Best Buy was founded in 1966. Today, the company is the largest electronics retailer in the United States and Canada. The company closed its Mexican stores in fiscal year 2021. It now has approximately 938 Best Buy stores, 16 Best Buy Outlet stores in the United States, 21 Pacific Sales stores, 127 Best Buy stores in Canada, and 33 Best Buy stores in Canada. Best Buy independent stores in Canada. Canada. The retailer also runs an e-commerce store. Revenue totaled $51.761 million in fiscal year 2022 and the past twelve months.

Best Buy sells computers, mobile phones, televisions, home appliances, home theater systems, printers, etc. In addition, the retailer sells installation services through outside contractors. Best Buy’s Geek Squad provides installation and repair services.

Major brands include Best Buy, Magnolia, Pacific Kitchen, Lively, Yardbird and Home.

growth and profits

Best Buy continues to grow organically, building on its position as the largest retailer of electronics and services in North America. Although Best Buy has big competitors, they primarily sell electronics as part of a larger number of SKUs and don’t focus solely on electronics. Moreover, their focus is often on the low price.

On the other hand, Best Buy focuses on electronics, hardware, and services, but prices are still competitive. Instead of just following a low-price business model, Best Buy has developed Geek Squad Services and as a differentiating factor. The company offers installation, repair, removal and aftermarket services that are not at the same level of expertise as most competitors. Additionally, Totaltech offers free extended warranties, free delivery, VIP phone and chat support, and member pricing. Hence, Best Buy has developed a competitive advantage.

The result is that Best Buy dominates brick-and-mortar sales with a 40% market share. It also generates about a third of sales from the online channel. Reportedly, one in three TVs, laptops, and PCs are sold by Best Buy. Additionally, the retailer leads the way in sales of gaming consoles, hardware, headphones, mobile phones, small appliances, cardio machines, phone accessories, and imaging products.

Best Buy Overview

Best Investor Relations to Buy

Best Buy’s competitive advantage has led to revenue and profit growth, particularly in the past five years. The company suffered from declining revenue until around 2018. However, Best Buy reversed the trend by moving to an omnichannel sales model and emphasizing value-added services. Additionally, prioritizing online sales growth, optimizing store counts, and extracting cost efficiencies helped drive margins and earnings per share.

Furthermore, the company has experienced significant tailwinds from the COVID-19 pandemic and associated federal stimulus. However, this is slowing, and sales in fiscal year 2023 and 2024 may be lower than in fiscal year 2022.

Best purchase revenue direction

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Best EPS Buying Direction

Insight wallet

Best Buy Risks

Despite Best Buy’s success, it faces significant competition in its market space. The list of electronics retailers is long and includes Amazon, Walmart, Target, Costco, and others. There are smaller specialty retailers in regional and online stores. Many manufacturers such as Apple (AAPL), Dell (DELL), and Hewlett-Packard (HPQ) sell directly to consumers over the Internet. In addition, Apple sells through its stores.

Many of these competitors have deeper pockets than Best Buy and are likely to be able to displace the company as the market leader. Moreover, any mistake by Best Buy means a loss of market share.

Next, Best Buy faces cost pressures through rising costs of labor, supplies, rent, and shipping.

Dividend Analysis

Best Buy is a revenue contender with 19 years of growing profits. The latest dividend increase was 25.7%, with a quarterly dividend rate of $0.88 per share from $0.70 per share. The forward dividend yield is now around 3.68%. That value is more than double the average dividend yield of about 1.3% for the S&P 500 and the 5-year lag average of about 2.52%.

The company has been paying a dividend since 2003. Best Buy’s earnings have grown at a double rate over the past decade and should continue to be on a payout basis. The 10-year dividend growth rate is 16.27% CAGR, the 5-year dividend growth rate is 20.11% CAGR, and the 3-year dividend growth rate is 15.87% CAGR.

Best Buying Profit Growth

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Dividend safety is excellent based on earnings, free cash flow, and balance sheet.

The financial guidance consensus 2023 for adjusted earnings per share is $8.84. The forward annual dividend rate is $3.52 per share, giving a payout ratio of about 40%. This value is conservative and below the target value of 65%. The payout ratio value also supports future earnings growth in the long run without jeopardizing the integrity of earnings.

In addition, the free cash flow (FCF) covers more than dividends and meets my 70% threshold. In fiscal year 2022, operating cash flow was $3,252 million. The FCF was $2,515 million. The dividend demanded $688 million, giving a dividend-to-FCF ratio of approximately 27%. This percentage is below the target value and is very conservative, which means there is little risk to profits.

Best Buy has a conservative balance sheet and net cash position which add to the safety of its dividend. At the end of fiscal year 2022, the company had $2936 million in cash and cash equivalents. There was no short-term or long-term debt. Long-term debt was $1,189 million, which means Best Buy has a net cash position. In addition, Best Buy has a low to medium investment grade credit rating of BBB+ from S&P Global and an Aa3 above average investment grade credit rating from Moody’s. Thus, debt does not currently pose a risk to the company’s earnings.

Evaluation analysis

The analyst’s agreed-upon fiscal year 2023 earnings are now $8.84 per share. We’ll use 13X as a reasonable value for double profits. It’s just below the mid-range point of the past decade. We’re calculating slowing sales and increased competition to be conservative.

Our fair value estimate is $114.92. The current share price is approximately $94.40, which indicates that the stock is undervalued based on earnings.

Applying sensitivity analysis using price-earnings (P/E) ratios between 12X and 14X, we get a fair value range of $106.08 to $123.76. Thus, the current stock price is 76% to 89% of the fair value estimate.

Estimate present value based on price-to-earnings ratio

P/E Ratio

12

13

14

estimated value

USD 106.08

USD 114.92

USD 123.76

Percentage of appraised value at current stock price

89%

82%

76%

Source: ividendpower.org accounts

How does this compare to other evaluation models? finbox’s multiple EV/EBITDA analysis gives a fair value estimate of $130.32 per share. The model assumes a multiple of 7.7X. The Gordon Growth model is not suitable because the rate of earnings growth is too high. Portfolio Insight’s hybrid fair value model of accounting for P/E ratio and dividend yield gives a fair value of $125.03 per share.

These three models average about $123.42, which indicates that Best Buy is undervalued at the current price.

Assuming a conservative 6% EPS growth rate over the next five years and the same valuation of the 13X P/E multiplier gives a fair value estimate of about $141.96.

Best Buy is currently trading below the 50-day and 200-day exponential moving averages after dropping from a 52-week high in late November.

BBY . stock valuation

stock rover

last thoughts

Best Buy is a stock that is a bargain at the moment. First, the valuation is now lower than the middle of the last decade, and several models show the stock is undervalued. After that, the dividend yield is almost as high as in April 2020. Finally, the company continues to increase the dividend at a double-digit rate. Additionally, Best Buy is a dividend competitor with 19 years of consecutive dividend growth. There are a lot of things that investors love here. I see Best Buy as a long-term buy.

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