2023-12-23 08:28:50 ET
Summary
- Best Buy rated neutral/hold today, agreeing with the consensus on Seeking Alpha, which also calls for a hold.
- Proven dividend income stability and growth play.
- Mixed sentiment on recession risk for 2024, offset by strength in the start of the current holiday shopping season.
Stock Snapshot
Heading into the home stretch this holiday shopping season, today's research note covers a major US retailer, Best Buy Co. ( BBY ).
A few quick facts about this stock are that it has +1,000 stores in US and Canada, launched several "teen tech centers" via its non-profit Best Buy Foundation , and besides retail locations has a robust eCommerce site (BestBuy.com) with a focus on electronics, home office accessories, and related products.
Personally, I have shopped at this brand dozens of times in various cities in the US, but for a moment I want to step outside the box of a customer and into the driver's seat of a potential investor in this company.
Scoring Matrix
This article uses a 9-point scoring matrix that holistically considers multiple angles of the stock, with an emphasis on dividend-income potential for investors and fundamental trends from the key accounting statements such as the balance sheet and income statements, as well as a future-looking outlook on this stock.
I continue to test this methodology in my own portfolio, on stocks I don't cover here, and it is my standard for building a long-term dividend-income portfolio that grows each year. So, I personally have a capital stake in this approach being successful.
Today's Rating
Based on the score total in the score matrix above, this stock is getting a rating of hold.
Compare to the consensus rating on Seeking Alpha, I am basically agreeing wholeheartedly with the consensus from analysts, Wall Street, and the quant system as of today:
Best Buy - rating consensus (Seeking Alpha)
Dividend Income Growth
This section uses dividend growth data to explores the 10 year dividend income growth for a hypothetical investor owning 100 shares, to determine whether this stock is a great dividend income opportunity.
If we study the above trend chart we can see that in 2013 the annual dividend was $0.68, which would make us $68/year in dividend income on 100 shares held. Had we then held those shares until 2022, when the annual dividend was $3.52, our income would be $352. That is an over 400% growth in 10 years.
That in my opinion is an impressive triple-digit growth so far, but what about going forward? Well, we can see that for 2023 the annual dividend is already up to $3.68 ($0.92/share quarterly) so it continues to grow, a sign of this company's ability to continue returning capital back to shareholders.
Just for kicks, if the same growth rate of 400% continues until 2032, and we still held the same 100 shares by then, our portfolio could see upwards of +$1,760 in annual dividend income.
In this category, I would call this a strong buy opportunity, on the basis of proven triple-digit dividend growth over 10 years, and continued growth heading into 2024.
Dividend Yield vs Peers
This section uses dividend yield data to compare the trailing dividend yield vs 2 or 3 similar peers in the same sector, to determine if this stock presents the most competitive dividend yield on capital invested.
In this chart above, I used the handy dividend yield comparison tool from Seeking Alpha to compare my focus stock of Best Buy against three stocks I would call peers. I picked these 4 companies just knowing where customers usually may go to shop for things like electronics or games, for example. These include Best Buy, Amazon ( AMZN ), GameStop ( GME ), and Target ( TGT ).
Thinking like a dividend investor, I am looking to pick the best yield for my capital invested. In this group, Best Buy led the way with a 4.85% yield.
While GameStop and Amazon do not appear to pay dividends, fellow store chain Target does, with a yield in the +3% range.
In this category I would call Best Buy a strong buy on the basis of nearly 5% dividend yield and better than the peers mentioned.
Revenue Growth
This section explores this company's revenue growth trends over the last year, using data from the income statement.
What it tells us is that in the quarter ending October the company achieved $9.75B in total revenue , vs $10.58B in Oct 2022, a 7.8% YoY decline.
At the same time though, gross profit grew to $7.24B from $6.83B in Oct 2022, a 6% YoY growth.
From its current FY24 Q3 earnings release that came out on November 21st, we can see that although the company has revenue diversification it has seen sales declines in multiple segments:
In their domestic US market, they cited as drivers of sales weakness as "appliances, computing, home theater and mobile phones. These drivers were partially offset by growth in gaming."
Looking forward, their top-line guidance for FY24 is less than favorable, expecting " comparable sales decline of 6.0% to 7.5% , which compares to prior guidance of a decline of 4.5% to 6.0%."
To make sense of these sales headwinds, I turned to retail industry portal RetailDive which suggested in their late November article that more customers are being hesitant to purchase electronics lately:
Best Buy continues to struggle with uneven consumer demand.
With consumers holding back on big-ticket purchases, or choosing to use their funds elsewhere, Best Buy risks losing out not just on sales but also foot traffic that often drives additional purchases, according to GlobalData Managing Director Neil Saunders.
I would call this stock a sell in this category then, on the basis of declining revenue performance, declining full-year sales forecasts, weakness in multiple business segments not just one, and evidence of headwinds to electronics demand.
Earnings Growth
This section explores this company's earnings (net income) growth trends over the last year, also using data from the income statement.
What this data can tell us is that net income of $263MM was achieved in the last quarter, vs $277MM in Oct 2022. This is a +5% YoY decline.
We can see from the income statement that interest costs increased somewhat to $14MM, vs $10MM in Oct 2022. However, at the same time it appears that operating expenses declined on a YoY basis.
The company is forecasting the following: "on the profitability side, we expect our Q4 FY24 non-GAAP operating income rate to be in a range of 4.7% to 5.0%, which compares to a rate of 4.8% last year.”
Keep in mind also that the next earnings results that come out in late February ought to have the full holiday season results.
According to CEO Barry in their recent quarterly results commentary:
We are excited for the important holiday season and are prepared for a customer who is very deal-focused with promotions and deals for all budgets, new shopping experiences, an expanded product assortment, and fast and free fulfillment..
Positive tailwind to support this sentiment is recent data as reported by Forbes magazine , indicating a strong start to the season early on:
In the first couple days of the holiday shopping season, records have shattered . According to the National Retail Federation, 200.4 million people shopped online or in stores between Thanksgiving Day and Cyber Monday this year. This is an increase of 2% from 2022, and the highest number NRF has tallied since it started tracking holiday results.
So, I will call it a hold in this category because although there was a YoY earnings decline it was barely 5%, and the forecast by the company is calling for profitability, while third-party data is showing holiday shopping strength, and I know the importance of sales for a company like this between November and New Years Day, probably the most critical month for retail.
Equity Positive Growth
This section explores this company's equity (book value) growth trends over the last year, using data from the balance sheet.
Here we see a YoY drop in equity as it fell to $2.81B this October, vs $2.99B in Oct 2022, a 6% YoY decline.
We can see however that the company continues to have capital strength. According to its quarterly release:
On a year-to-date basis, the company has returned a total of $873 million to shareholders through dividends of $603 million and share repurchases of $270 million.
Why the relatively low equity number then for a company with $16.8B in total assets? Well, the fact is that it also has $14.07B in total liabilities, so liabilities are nearly 84% of assets. That is understandable in a business model impacted by the high overhead costs of managing hundreds of stores, warehouses, and a massive supply-chain. It costs money to run a brick-and-mortar business, after all, despite it also having a robust eCommerce business too.
So, in this case I will call this a hold in the category of equity because book value/equity only declined around 6% and the company has capital strength to return capital to shareholders via dividends/repurchases, however the larger issue is that equity is relatively low to begin with as they are heavy on liabilities. One of them is long-term debt, lingering around $1.1B.
Share Price vs Moving Average
This section uses the YChart tool to explore the current share price compared to the 200-day simple moving average , to decide if it currently presents a buy, hold, or sell opportunity. The 200-day SMA is my standard long-term trend indicator I prefer for its simplicity and smoothing out the price movement.
From the YChart above, we can see a share price of $75.78 and the 200-day simple moving average I am tracking. As of this article writing, the price is about +2% above the moving average.
It appears from this chart that I missed out on the autumn price dip into the low $60 range, so now I would call this more of a hold at the $75 range because they did not impress with any great earnings or revenue YoY growth and have a balance sheet burdened by liabilities, as well as recent demand weakness for electronics.
The other canary in the coal mine for a while now is the vast amount of competition this type of business has online in terms of selling similar products. The customer tactic of perusing the product at Best Buy or Target to get a feel for it and then going online to try and scoop up the same item at a much better price is not so unusual by now, so Best Buy I think will have to compete extra hard to get those customers who are on the verge of buying and convince them it is Best Buy they should get the product at first.
With that said, as an investor I would hold this stock until we see the holiday sales results and earnings release in February, so would consider it a dividend income play in the meantime.
Valuation: Price-to-Earnings
This section uses valuation data to explore the forward P/E ratio and whether it presents an undervaluation opportunity or appears overvalued.
In this metric, we can see a GAAP-based forward P/E ratio of 12.56 , nearly 30% below its sector average.
Tying this multiple of 12.5x earnings back to the financials and share price, we can see a combination of the share price rising above its moving average while earnings have seen a slight decline.
Again, I say hold on this one because the valuation at 12.5x is below average but also the market is pushing up the "price" side of this multiple it seems while earnings have not caught up yet. A blowout holiday quarter could give earnings that boost they need to catch up and lower this multiple some more.
Valuation: Price-to-Book Value
This section uses valuation data to explore the forward P/B ratio and whether it presents an undervaluation opportunity or appears overvalued.
In this metric, we see a forward P/B ratio of 5.12 , nearly 93% above its sector average.
Tying this multiple of over 5x book value back to the earlier metrics I discussed, it appears what is driving it is the spike in share price combined with a declining book value, making this stock appear overvalued.
I don't think a valuation of 5x presents a buy opportunity so I will pass on this one, and call it a hold instead. Again, due to the book value /equity declining while the market is driving up the share price above its moving average.
Risk Analysis
This section identifies a key risk to consider about this company and what its probability and impact could be to the business.
This being a retail business that is also very recessionary, looking beyond the sales surge this holiday season we also want to invest in a business with sustainability beyond just one holiday season, since after all there are 12 months in a year.
According to the Dec. 19th analysis from global consultancy Bain & Co:
Globally, all the ingredients for continued economic fragility and uncertainty are present. The risks of an adverse surprise—financial or geopolitical—remain high. With uncertainty unlikely to dissipate any time soon, it’s critical for companies to prepare for a range of economic and geopolitical scenarios.
A major American magazine like US News & World Report in their Dec. 19th article seemed to show a mixed sentiment on this issue:
Inflation and rising rates have not yet dragged down the U.S. economy. The U.S. added 199,000 jobs in November, and the unemployment rate remains historically low at just 3.7%, according to the U.S. Bureau of Labor Statistics.
Investors should continue to monitor the labor market in coming months as tight monetary policy often has a lagging impact on economic growth. U.S. GDP grew 5.2% in the third quarter of 2023, but the latest Federal Reserve economic projections suggest that growth will slow to just 1.4% for the full year in 2024.
So, as far as the downside risk of a recession in 2024, I would say the evidence suggests a middle-of-the-road approach is best now, indicating a hold rating would be warranted on this stock.
Incidentally, an upside risk to mention could be that the Fed begins lowering interest rates much sooner than expected, thereby creating a domino effect of lower credit costs throughout the economy, and cheaper to finance that new electronics purchase too, spurring more sales.
However, that is less likely to occur, as CME Fedwatch predicts only a 16.5% chance that the Fed lowers rates at its next meeting which is not until Jan. 31st.
Quick Summary
Briefly summarizing today's note, I am going neutral on this stock by giving it a hold rating as I am not impressed with its YoY growth numbers and weakness in sales, considering that sales is the lifeblood of a retail product business.
At the same time, it has a proven dividend income growth trend and continued capital strength to support its dividend, so more of a dividend income play right now and to add some exposure to this sector in my portfolio of non-retail stocks.
This will be a critical holiday sales season and at this time we don't know the full outcome until the season is over and the figures are tabulated.
For further details see:
Best Buy: Hold For Dividend Growth As Earnings Attempt A Holiday Rebound