Yahoo Finance Best Buy Stock Upgraded: What You Need to Know
Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
It's been two months since Best Buy (NYSE: BBY) reported its fiscal Q4 2019 earnings blowout, sparking a whole series of upgrades and price-target hikes on Wall Street that continued into March. It will probably be another month at least before we see Best Buy report Q1 2020 results, followed a month later by Corie Barry taking over as its new CEO.
For anyone looking to invest in Best Buy, that would seem to mean there's plenty of time to decide whether or not to buy shares. Yet despite the lack of urgency, this morning one investment banker stepped forward and urged investors to buy Best Buy now.
Why?
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Why buy Best Buy now?
Perhaps it's because Best Buy stock looks cheap?
With a $20.2 billion market capitalization and $1.5 billion in trailing earnings, Best Buy shares sell for a price-to-earnings ratio of just 13.5. Considering that Best Buy pays its shareholders an annual 2.8% dividend yield, that would imply that any growth rate above 10% or so would suffice to give investors the 13.5% total return necessary to make this stock a bargain.
Of course, most analysts do not expect Best Buy to grow that fast. Expectations in the brick-and-mortar retail sector remain muted in the face of competition from Amazon, and on Wall Street, the consensus remains that Best Buy will probably struggle to maintain earnings growth rates of better than 8%.
Upgrading Best Buy (anyway)
And yet, if you ask investment banker Jefferies & Co., those growth expectations may be underestimating just how profitable Best Buy could become. In this morning's upgrade, Jefferies makes the case that not only is Best Buy a buy, but that the stock, which currently sells for about $75 a share, is worth something closer to $88.
What draws Jefferies to this conclusion? In a word: "services."
Best Buy has been ramping up a new program called "In-Home Advisor," in which customers can invite Best Buy consultants to visit their home -- for free -- to offer in-person advice on what appliances, entertainment systems, and smart devices would be best suited to the buyer. As a result of this program, the company has seen not only sales growth, but larger purchases by consulting consumers relative to in-store shoppers -- and better profit margins.
Combined with a push to sign up consumers for "Total Tech Support" for their electronics in home, by phone, and online, Jefferies believes that Best Buy is leveraging its wide network of physical stores to grab a greater share of consumer electronics spending, and to create an "upward trajectory of high-margin services," as explained in a note on TheFly.com.
Moreover, Jefferies argues that the current consumer electronics cycle will last longer than many of its peers on Wall Street are expecting. As one of the last physical store retailers still standing in the consumer electronics space, Jefferies expects Best Buy to benefit disproportionately from this trend, enjoying "outsized share gains."
Is Best Buy a buy?
And to an extent, I agree with that. Best Buy's retail locations closer to the consumer enable it to provide services that Amazon just can't match. Sure, Amazon can (and does) permit customers to hire installation services through its website, but there's a big difference between getting a service from an unfamiliar contractor, hired third-party via Amazon, and getting a branded service directly from the store that sold you the goods.
Best Buy can provide that. Amazon can't. (Yet.)
Now, the question remains: Will this advantage translate into Best Buy outperforming Wall Street's expectations, and growing earnings faster than the 8% annualized rate other analysts project? Maybe, maybe not. I would point out, however, that 8% growth seems a low bar to clear -- and the company has already beaten consensus analyst estimates in each of its last four reported quarters.
Considering Best Buy's record of earnings success, and the low bar that Wall Street has set for earnings growth, I wouldn't bet against Jefferies being right in recommending Best Buy stock today.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.
