Event: Best Buy (BBY) reports Q4 results tomorrow morning before the open. The options market is implying about a 6% one day move which is shy of the 4 qtr average of about 4.7%. It is important to note that BBY was down 14% on Jan 15th after issuing a disappointing Holiday Sales and sober near term outlook highlighted by the following trends:
there are also external pressures that we discussed last quarter that are driving structural industry changes, including (1) deflationary pricing; (2) weak industry demand in NPD-reported Consumer Electronics categories; (3) declining demand for extended warranties; as well as (4) exchange rate volatility in our International businesses. And to win against this backdrop, we have to lead – which requires investing now. Therefore, we are already beginning to make the incremental investments in the growth initiatives that we just discussed which will put year-over-year pressure on our non-GAAP operating income rate beginning as early as Q1 FY16.”
Price Action / Technicals: The stock’s mid Jan gap lower basically came from 52 week highs, which I found to be troubling at the time, but he stock has since filled in most of that gap:[caption id="attachment_51508" align="aligncenter" width="600"] BBY 1yr chart from Bloomberg[/caption]
The 4 month range seems fairly well defined between $34 on the downside, just above the stock’s 200 day moving average (yellow) and $40 on the upside.
Sentiment: Wall Street analysts are surprisingly bullish on the stock with 21 Buy ratings, 7 Holds and only 1 Sell with an avg 12 month price target of $41.50, or about 8% higher than current levels.
Implied Vol SnapShot: Option prices headed into the print are at much lower levels than the last few quarters, largely due to the pre-announcement in January, and the generally low equity vol environment:[caption id="attachment_51509" align="aligncenter" width="600"] BBY 1yr chart of 30 day at the money Implied Vol from Bloomberg[/caption]
Valuation: On a P/E basis the stock is not particularly expensive trading at about 16x expected earnings, the problem is that sales have been declining from $55 billion in 2012 to $41 billion in 2015. The question is whether the company can stave off the onslaught of competition from cheaper better equipped logistics companies like AMZN and hold onto market share and become consistently profitable.
MY VIEW: On the that last bit, I am hard-pressed to see how BBY does not just wither away. I know, I know lots of smart people suggested they would not be far behind Circuit City’s demise, but there is no doubt they benefited from losing a massive competitor. One competitor they will never beat is AMZN and I suspect their comfortability to sell the same items as BBY at no profit will make it a tough row to hoe.
In the near term as for the set up into tomorrow’s print, I suspect a lot of bad news is out, and given the stock’s re-tracement of most of the Jan losses it is safe to suggest that investors are expecting a more upbeat outlook than was given in Jan. So the set up is tough, if the company is able to guide up a little, than the stock should break-out above the recent highs near $40. If the company reiterates their previous downbeat out look and actually extends it a bit then the stock will likely re-test the recent lows towards $34.
A bullish structure for those looking to play a breakout up near the 2014 highs is the May 40/44 call spread at around $1.
A bearish thesis probably just wants to isolate the event. In that case the March 6th 38.5/34.5 put spread around $1 is probably the safest way to express that view.