Wednesday, December 14, 2011

Best Buy Price vs Value

Shares of Best Buy (BBY) fell more than 15% yesterday after the company reported its 3rd quarter results. It's pretty strange that a company can lose so much of its value on the basis of one quarter, as the company came up 4 cents short on analyst EPS estimates. But it's even more strange for a company like Best Buy, which makes most of its annual profits in the 4th quarter (as per the chart below), which means the 3rd quarter profit result doesn't tell you a whole lot about the business' long-term prospects:

On an annual basis, Best Buy has shown remarkably consistent returns on invested capital, as illustrated here.

So yesterday, it's likely that the company's price fell much more than did its value (if its value fell at all). Such divergences between price and value can give long-term investors the opportunity to profit.

After yesterday's price dive, Best Buy trades for just over $8 billion, even though it has a net cash position and earns about $1.3 billion annually. Furthermore, in just the last five years, Best Buy has returned $6 billion to shareholders through dividends and buybacks. Management has been clear that buybacks will continue as long as the share price remains depressed.

Best Buy's price is indeed volatile, as any 5-year price chart will show you. As shown by its returns on capital, however, Best Buy's value is remarkably stable. Long-term investors can profit by buying when pessimism reigns and selling when optimism returns.

Disclosure: Author has a long position in shares of BBY

4 comments:

Paul said...

Off-topic question: any idea where to find past quarterly conference call transcripts? I'd like to go back a few years (to 2009) for a few companies I'm researching. Thanks for any ideas!

Anonymous said...

BBY is certainly getting cheap, but to point to historical ROE and pretend that there aren't serious issues and that all the metrics are not trending negative is dangerous. There is a lot of inherent operating leverage in retail and their big box stores are really sucking wind. They essentially admitted that business model isn't optimal and have stopped building big boxes in favor of smaller mobile only stores. Again, likely getting cheap but not without risk.

Anonymous said...

a value trap like radioshack. this company is in secular decline and i'd be surprised if they exist in 10 years.

Anonymous said...

I would posit that there is a big difference between BBY & RSH.

BBY has huge "big box" stores that need lots of heating & cooling, electricity, employees, insurance, etc.

RSH has a much smaller footprint, and a lot less overhead.

I regularly buy electronics online, BUT I will go into RSH to get a needed part such as powercords, batteries, etc.

I could foresee a future where BBY is much smaller or gone, BUT RSH still makes it selling parts & knick knacks...

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