UPDATE: Best Buy (BBY) Report FY12 Q1 Tomo Pre-Open, Prob Best to Wait to Buy

by Dan June 14, 2011 10:40 am • Commentary

BBY reported this morning and left their FY’12 guidance unchanged….stock gapped up almost 8%  on the opening (inline with the implied move) and hasn’t seen an uptick since…..now the stock up only 3% as I write….

These guys are dreaming if they think they will not have to lower that full year guidance at some point……as I said when I suggested the bearish trade structures yesterday afternoon the only real thing to play for is a cut in that guidance as a lot of bad news is in the stock and it is fairly oversold…..well the cut didn’t come and in hindsight I am much happier that I defined my risk through Put Spreads as if I were short I might have had to cover some on the opening up 8% (ugh)…..now my Put Spread is basically worthless, but I may be back in game at some point before Friday’s expiration.


BBY $28.83: company reports their fiscal year ’12 1st quarter tomorrow before the open.

-the implied move in the options market is about 8% which is slightly rich to the 8 qtr average move of about 7%, but inline with the average over the last 4 quarters.  [private]

-the stock is down almost 16% ytd and 36% from the 52 week highs made in Late 2010.

-Wall Street analysts are fairly mixed with 12 buys, 13 holds and 2 sells.

Citi on Valuation (they have a Sell and $27 12 month target):

Our 12 -month PT is $27. Over the last three years, the average forward year P/E
multiple was 12.9x, and ranged between 7.0x and 15.9x. We think the stock should
trade below its 3 year average multiple as the company faces increased competition
domestically, increased execution risk in expanding into multiple geographic markets,
margin pressure for its core large ticket CE products and services businesses, and
increased risk of missing guidance. If we apply a 8x target multiple to our FY13 EPS
estimate of $3.42 we derive a target price of ~$27.


-The company is facing massive competitive issues from the likes of AMZN and they are seeing margin degradation from the their reliance on flat panel tv’s and their ever-declining prices.  This is well known and likely in the stock.

-the stock will trade on the guidance that they give for the Full Fiscal year, which was left unchanged when they hosted their annual analyst meeting back in mid April and stock is in almost the same place as it was April 14th.   Guidance cut was expected than, and it is again now, I guess the real issue is how much of a cut is in the stock…..

-I want to be short the name as I think a cut below 3.00 for FY12 could send the stock back towards $25-26 as  it is the only real support that I see…..Current guidance for the year is $3.30 to 3.55 and the street’s consensus estimate is $3.46.

-I wouldn’t be outright short a stock like this as it is very oversold, and the market is getting a little oversold and feels like any good news could snap it back and retrace maybe half of the last month’s sell off in the S&P.

-Use options tactically around earnings and define your risk……I am not ready to make a bullish bet purely on sentiment and think we could see one final flush if guidance is worse than what the Street expects.

TRADE:  BBY (28.83) Buy the June 28/26 Put Spread for .42

-Buy June 28 Put for .60 and

-Sell June 26 Put at .18

Break-Even on June Expiration (this Friday):

Upside: btwn 28 and 27.58 lose up to .42, above 28 lose all .42

Downside: btwn 27.58 and 26 make up to 1.58, 26 or below (down ~10%) make full 1.58.

OR commit less premium and play for a full scale disaster……

TRADE 2: BBY ($28.83)   Buy the June 27 / 25 Put Spread for .26

-Buy June 27 put for .35

-Sell June 25 put at .09

Break-even on June Expiration:

Upside: btwn 27 and 26.74 lose up to .26, above 27 lose all .26

Downside: btwn 26.74 and 25 make up to 1.74, 25 or below (down ~13%) make full 1.74.