To The Moon

Much of last week’s relatively light economic calendar came in roughly in line with expectations, most notably the Commerce Department’s personal consumption expenditure (PCE) price index report, released Friday morning, which rose 0.2% in April, down slightly from the previous two months. The best-performing concepts are Real Estate Operating Companies, Computer & Electronics Retail and Marine Ports & Services.

Considering the different perceptions of the stock, this time TigerPicks chose $Best Buy(BBY)$ to have a fundamental highlight to help users understand it better.

$Best Buy(BBY)$

• Shares of electronics retailer Best Buy (NYSE:BBY) jumped 12% in the morning session after the company reported first quarter results that beat analysts' gross margin and EPS expectations.

• On the other hand, its revenue missed as its same-store sales fell by more than projected (a 6% drop vs an estimated 5% drop). However, guidance was more encouraging, with the CFO admitting that the business is already trending towards the midpoint of the annual comparable sales guidance.

Best Buy: Close To The Beginning Of The New Cycle

Summary

• Best Buy is undervalued and has the potential for capital appreciation due to its solid business model and exposure to the consumer electronics industry.

• The company has survived the threat of e-commerce platforms like Amazon and has increased its online presence to compete effectively.

• Best Buy's earnings depend on the growth of the overall market, and the recovery in the consumer electronics cycle is a positive indicator for the company's sales.

Geek Squad van parked at Best Buy

Best Buy (NYSE:BBY), a classic American retailer, is perfectly placed to outperform the markets if a macroeconomic catastrophe doesn't occur. Valued at under 13.5 times forward earnings and 40% down from its 2021 highs, the consumer electronics giant store chain is ideally placed to see capital appreciation while offering a high-quality staple-ish business with excellent cash flows, a solid balance sheet, and direct exposure to lower interest rates that might come in the future.

Chart

Why is Best Buy a great idea to invest at the beginning of the cycle?

Best Buy's business model is relatively simple: it sells PCs, mobile phones, appliances, TVs, home theaters, headphones, speakers, and anything related to hardware and technology. According to its latest 10-K, these products are sold throughout the US and Canada in more than 1125 well-placed stores and through its digital channels, responsible for 38% of domestic sales.

The company survived the war, which the e-commerce platforms led by Amazon (AMZN) declared. Then, it survived the 2020 period by substantially increasing its online presence and allowing it to take a big part of its revenues, replacing some brick-and-mortar market shares. This partial disruption also allowed the company to increase its real estate leverage by offering services that Amazon couldn't, like in-store pick up of online orders, for people who prefer not to wait for any package shipment or queue. This has also been quite successful at preserving Best Buy's revenues by covering up to 44% of total digital sales.

Adding to Best Buy's solid business, ready to fight e-commerce while embracing it, as mentioned in the Q4 2023 FY earnings call, the company has a third of the market share in both the US Computing and TV industries and also 20% in gaming, which speaks of a high-quality business that has survived, with scars, the giant e-commerce menace.

This means that the company is a pure exposure to the consumer electronics industry, but because it is a retailer, margins will be less volatile than the actual manufacturers. Then, the stock will also be less volatile, providing fewer opportunities for capital appreciation. While the actual suppliers can see their sales going up substantially in a cyclical fashion, and therefore their earnings, Best Buy will have to maintain its margins relatively narrow to be able to compete against other giants like Amazon and Walmart (WMT), so the real gains in terms of earnings would come not just from some supplier selling more of a product, but because of the entire public buying more because of a good change in macroeconomic conditions.

Suppliers are seeing the beginning of the recovery in the Consumer Electronics cycle

Having defined that BBY earnings depend directly on the entire market being able to grow, it's time to see how manufacturers are doing. We can see this as a leading indicator for retailers, not only for sales to grow immediately but also for seeing if the consumer electronics cycle can revive and to what magnitude.

For instance, the company has declared that its five biggest suppliers are Apple, Sony, Samsung, LG, and HP. Let's see what each manufacturer has to say about its sales.

First, of course, Apple, in the Q1 2024 earnings report, referred to the three last months ended in 2023, has seen a stabilization in product sales compared with a year ago for the quarter ended in December 2023:

Apple Sales by Segment table

Apple Sales by Segment (Apple Consolidated Statement FY2024 Q1)

Unfortunately, it couldn't keep up for the first quarter of 2024 (Q2 FY2024), with a downfall in product sales of about 10%.

Apple Sales by Segment table

Apple Sales by Segment (Apple Consolidated Statement FY2024 Q2)

Secondly, in its last annual report, Sony forecasts it will grow by 1%, excluding financial services. Sony forecasts a minimal slowdown in Gaming, Pictures, and Entertainment but a sensible increase in Imaging and Sensing solutions. While the last segment has no direct exposure from Sony to the consumer, its clients and other big companies like Samsung buy these products to sell them to consumers. I still consider this a decent indicator.

Sony 2024 Sales Forecast

Sony 2024 Sales Forecast (Sony FY 2023 Consolidated Results)

Third is Samsung, a hugely diversified company so that we will see only the segments' forecasts with exposure to the consumer. First is the smartphone/tablet/wearable segment, which is anticipated to stabilize consumer sentiment. This is found in Samsung's latest annual report presentation.

Samsung Expected Sales MX

Samsung Expected Sales MX 2024 (Samsung Q1 Earnings Presentation)

Secondly, the company expects the demand for TV to recover, although they are still cautious.

Samsung Expected Sales TV 2024

Samsung Expected Sales TV 2024 (Samsung Q1 Earnings Presentation)

LG, the fourth supplier on the list, has various forecasts for each business segment. Let's see those with consumer exposure. First is appliances, where they expect an increase in demand for the second half of the year in North America, followed by a slow recovery. The company also expects a gradual improvement in the second half of the year in terms of TV and screens.

LG Appliance Demand Forecast

LG Appliance Demand Forecast (Q1 2024 LG Earnings Release)

LG TV Demand Outlook

LG TV Demand Outlook (Q1 2024 LG Earnings Release)

The fifth supplier in this supplier review is HP. Here, the company is seeing a sharp decline in printing sales, as shown in its last earnings report, so the important metrics to see are revenues in Personal Systems, which are beginning to stabilize. This is mainly because the company says that while revenues were down a bit, total units were up 5%, and consumer PS was up 10% YoY. This is an excellent sign of the beginning of a recovery.

HP Revenue by Segment Q1 2024

HP Revenue by Segment Q1 2024 (HP Q1 2024 Earnings Release)

The company by numbers

In its earnings release for Q1 2024, or Fiscal Year 2025, the company reported sales falling less than a year ago, just 6.1% compared to 10.1%. Operating income margin increased slightly to 3.8% Non-GAAP from 3.4%, releasing some pressure from the bottom line. Diluted EPS was stable but growing, nonetheless, both GAAP and non-GAAP.

On the other hand, the company's guidance is relatively conservative. It expects a slight decline in sales and decreasing non-GAAP diluted EPS.

Best Buy Earnings Results

Best Buy Earnings Results (Best Buy First Quarter Results Q1 FY2025)

Best Buy 2025 Forecast

Best Buy 2025 Forecast (Best Buy First Quarter Results Q1 FY2025)

The company's balance sheet is still decent, following its most recent earnings release, with Current Assets and Liabilities at a breakeven of over $7.7 billion. Long-term liabilities are reported at about 4B. These are covered by long-term assets of $2.26 billion in property, plant, and equipment, while the company's cash flows could eventually pay down all the debt in around three years.

Valuation

Fortunately, Best Buy is not only supposed to produce around $1.3 billion in FCF by the end of 2024 or 2025FY but is also actively buying back its stock and returning a dividend to its shareholders.

For the valuation model, I expect the company to grow Free Cash Flows by around 6% a year, showing a slow and conservative recovery back to the numbers of 2020, which is just around 2028. Additionally, I expect the company to continue buying at least 4M shares yearly. In this case, as the shiny part of the cycle arrives, I project the company to have a PE ratio of 15, just over the current 14-ish that the company has currently.

BBY Price Projection

Image Created by the Author Based on SEC filings and projections (Author)

This suggests that an investor could have decent returns of around 9% over the next three years by buying at $81 a share. While not groundbreaking, this might be an indicator if the stock manages to get an even better lower entry point in the near future.

Risks

Currently, I see at least two risks to this Investment thesis.

1. Macroeconomic environment deterioration

Clearly, if the current macroeconomic environment deteriorates, all the projections made by manufacturers could go wrong relatively quickly. In this case, the period of this thesis should be recalculated, and the company's state should be assessed.

2. Some disruption coming from geopolitics

Although I consider this risk relatively unlikely, some disruption in International commerce could damage the company significantly, as it might be impossible to satisfy consumer demand if products cannot get into the US. It is important to note that all the suppliers depend directly on Chinese, Taiwanese, or Korean manufacturing, making Best Buy a vulnerable target to geopolitical disruption.

Conclusion

Best Buy is a solid company with an excellent business model and a decent balance sheet. Bought at current prices, it could help shareholders take advantage of the recovery in consumer electronics industry sales. While this recovery might be slow, it is still a decent opportunity for the mid-term future, and the stock might be an excellent asset to diversify and grow a conservative portfolio.

Stock Price Forecast:

Based on 12 Wall Street analysts offering 12 month price targets for Best Buy Co in the last 3 months. The average price target is $87.00 with a high forecast of $101.00 and a low forecast of $67.00. The average price target represents a 2.57% change from the last price of $84.82.

Resource: https://seekingalpha.com/article/4696769-best-buy-close-to-beginning-of-new-cycle

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