From January 12, or the same day the SNB swore the "the minimum exchange rate must remain the cornerstone of our monetary policy" we got the following Best Buy upgrade from Neutral to Buy ($45 price target) courtesy of Goldman's crack Kermit crucifixion team:
Upgrade to Buy; product cycle, cap allocation, valuation
Source of opportunity
We upgrade BBY to Buy from Neutral with a new $45,12-month price target, suggesting 15% upside, among the highest in our sector after the group’s run. With solid sector fundamentals, including a surge in advanced TV sales, we are positioned above consensus for the next three quarters. We also see optionality on capital allocation and appealing valuation relative to our group. Beyond tactical considerations, we note BBY’s positioning as the sole surviving national specialty retailer in a category with increased product excitement; BBY’s better online sales growth; and, the reality that its pricing is increasingly at parity with Amazon, especially in TVs.
Catalyst
We stand above consensus for 4Q2014 – we expect solid sales when BBY reports holiday sales. We have stood above consensus for 1H2015, based on sales, and raise forecasts such that we are now in line for both 2H2015 and full year. Finally, we see the potential for a favorable reaction to any capital allocation decisions in light of the firm's hefty cash balance. We highlight an options strategy to trade these catalysts within.
Valuation
We see appealing valuation relative to our group (EV/EBITDA tied for lowest in our coverage, fourth highest FCF yield). Our new 12-month price target of $45 (vs. $38 prior) is based on risk/reward, deploying both EV/EBITDA (5.0x/7.0x/8.0x from 5.0x/6.2x/7.0x) and relative P/E (80%/96%/108% from 50%/90%/100%). Our revised multiples are based on stronger industry data releases and forecasts. We raise FY15/FY16 estimates on stronger sales and SG&A leverage
Fast forward to today when Best Buy is the Worst Buy after it reported the following:
“As we look forward to FY16, as we shared with you last quarter, we will continue to pursue a strategy that is focused on delivering Advice, Service and Convenience, at competitive prices. Within this strategy, we are focused on driving a number of profitable growth initiatives around key product categories, life events and services and on continuing to transform our key functions to support these initiatives. This strategy will be the foundation of our FY16 operating plan, and we are confident in our ability to execute against it as we have demonstrated this past year. But 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.
McCollam concluded, “Continuing on Hubert’s FY16 discussion, we do expect the impact of the external pressures he laid out to continue throughout FY16 and the impact of the incremental investments to begin in the first quarter. Additionally, we believe that the positive Domestic sales trends that we saw in mobile phones and home theater during the holiday period, in addition to the share gains we saw across other NPD-reported Consumer Electronics categories, were partially driven by the excitement around high-profile products and will not likely continue at holiday levels. As such, while we are excited about these investments and confident in our ability to execute against them, we are also appropriately cautious about the pressures. Therefore, we are currently expecting enterprise comparable sales in the first half of FY16, excluding the estimated impact of installment billing, to be flat to negative low-single digits and the non-GAAP operating income rate to be down approximately 30 to 50 basis points – reflecting a more modest sales environment and the impact of our incremental investments and SG&A inflation.
End result this:
[7]
And this:
[8]
