BBY ($27.37) reports it’s Fiscal Q4 earnings Thursday March 29th before the open.
-The options market is implying about a 5.5% move vs the trailing 8 qtr average move of about 7.85%. What’s interesting about the price performance over the last 8 qtrs, is that other than their 2 Q3 misses where the stock traded off by about 15% each time, the avg move over the other 6 qtrs in that 2 year period is about 5.3% (inline with the implied move this qtr).
| Ann Date | Per | Actual | Est | %Surp | %Px Chg | ||||
| 12/13/11 | Q3 12 | 0.47 | 0.509 | -7.66% | -15.46% | ||||
| 09/13/11 | Q2 12 | 0.47 | 0.527 | -10.82% | -6.45% | ||||
| 06/14/11 | Q1 12 | 0.35 | 0.331 | 5.74% | 4.55% | ||||
| 03/24/11 | Q4 11 | 1.97 | 1.844 | 7.38% | -5.40% | ||||
| 12/14/10 | Q3 11 | 0.54 | 0.602 | -10.30% | -14.82% | ||||
| 09/14/10 | Q2 11 | 0.6 | 0.439 | 36.67% | 6.00% | ||||
| 06/15/10 | Q1 11 | 0.36 | 0.501 | -28.14% | -6.07% | ||||
| 03/25/10 | Q4 10 | 1.82 | 1.792 | 1.56% | 3.59% |
Source: Bloomberg
Sentiment: Wall Street analysts fairly mixed to Neutral on the stock with 7 Buys, 19 Holds and 2 Sells, with avg 12 month price target of about $28.38 (per Bloomberg)…..short interest isn’t exactly low at about 16% of the float.
Dividend Yield: Stock currently yields about 2.4%, On March 20th,Goldman Sachs re-initiated the stock with a Neutral rating and 12 month $28 price target. After reading the note, it appears that GS analyst Matt Fassler (note below) might have been a bit more negative on his rating, but points to:
Potential for improved capital allocation
BBY operates with a payout ratio of just 19.7%. Given its challenged growth profile but solid cash flow, we believe it can sustain a higher payout. In fact, we model a 50% increase in BBY’s dividend.
Valuation/Balance Sheet: The real question for the stock is at 8x expected fiscal 2013 earnings, pretty cheap on a relative and historic P/E basis, is where is growth expected to come from? Earnings are only expected to grow 9% and sales a paltry 1% in the coming year in what is turning out to be a brutal consumer electronics selling environment for everything that doesn’t have a i before it’s name. Stock trades at a little more than 5x trailing 12 month sales, which depending on potential strategic initiatives, are in danger of going negative year over year. The company’s balance sheet is ok, as long as this years down earnings don’t become a trend and worse than that fall off a cliff (see Circuity City circa 2007/08) and while they have ~$2.3 billion in cash, they also have about $2.3billion in outstanding debt. Goldman’s Take on Valuation from their March 20th report:
Market skepticism reflected in modest valuation. BBY shares trade at the lowest 2012 P/E in our coverage, the lowest EV/EBITDA multiple (market cap of $1 billion-plus), and the highest FCF yield on 2012 forecasts.
Price Action/ Technicals: The stock is off about 50bps today, one of very few stocks in the entire market that is down, the only thing i can find is the following post this morning from Briefing.com:
Best Buy: Telsey Advisory Group expects BBY to miss Q4 ests (27.22 -0.29)TAG expects BBY to report 4Q12 EPS of $2.09 vs. $1.98 last year, the consensus of $2.16, and the implied guidance of $2.06-2.36 on Thursday morning. They continue to believe that Best Buy has a compelling opportunity to grow sales of mobile phones, but are concerned this will not be enough to offset the overarching structural issues; $28-30 tgt.
After a torrid 16% run over the last 2 weeks, the stock has basically filled in the earnings gap from December and faces a bit of resistance as it approaches the $28 level. The stock is trading above it’s 200 day moving average for the first time since mid December, and that was pretty brief.
[caption id="attachment_9996" align="aligncenter" width="300" caption="1 YR BBY Chart from Bloomberg"]
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The long term chart of BBY shows a slightly different picture, it has been in along term downtrend since it’s peak in 2006.
Will the “Death Rattle” be heard this year for BBY in the quarters to come? The chart below demonstrates that these stocks basically traded in lock step with one another, while BBY usually demonstrated some relative out-performance. I am not trying to be dramatic for the sake of being dramatic, Circuit City faced some very different challenges as it related to their business.
[caption id="attachment_9998" align="aligncenter" width="300" caption="11 yr Circuit City vs BBY from Bloomberg"]
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Volatility:
April vol is trading at about 42 while May and the further out months are less than 35.
[caption id="attachment_10002" align="aligncenter" width="477" caption="BBY Vol Skew from LiveVol Pro"]
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MY VIEW: As my friend Melissa Lee from CNBC likes to say, “BBY is merely AMZN’s showroom.” This fact alone is one of the main reasons why I don’t see a future for their business model. As GS mentions in the note below, online properties are offering too much transparency and the bricks and mortar stores just can’t compete on price. This is why it will be hard for margins to ever go up again for the commoditized goods that BBY sells.
I wouldn’t be long this stock with your money long term, I am sure because of their decent cash flow and real estate you will hear the eventual rumblings of Private Equity involvement, but I can’t imagine and other retailer in their right mind would buy these buys…. But as you know with stocks as cheap as this take-over chatter will come around from time to time, it do frequently in CC and does often in RSH.
Over the next couple days I will look to fade this recent move, not exactly playing for a miss of this quarter, but looking at a few months or quarters and viewing the name as a structural short on any strength.
Goldman Sachs report:
BBY (Best Buy)