2023-11-20 07:00:00 ET
Summary
- Best Buy has been heavily impacted by the decline in the electronics sector due to the end of the work-from-home trend following the Covid pull forward.
- The company's forecast for FY24 EPS remains strong at $6+, but the holiday period could be tough.
- The stock is cheap at 10x forward EPS estimates while share buybacks provide a natural boost.
The retail sector has been a minefield since the late 2021 Covid peak. Best Buy Co. (BBY) has been hit hard due to the big pull forward in the electronics sector with the work-from-home shift unwinding over the last 2 years. My investment thesis remains ultra Bullish on the stock due to the deep value while Best Buy trades at multi-year lows.
Source: Finviz
Another Tough Holiday
Best Buy forecast FY24 EPS estimates of $6.00 to $6.40. The consensus analyst estimates predict the company will earn $1.20 per share for FQ3'23, down over 13% from last FQ3.
As with other retailers, Best Buy saw earnings surge during the early days of Covid. The electronics retailer saw revenues surge 21% YoY in FQ3'21 leading to flat to negative results since that period.
The company produced FQ3'19 sales of $9.8 billion and the current guidance is basically flat revenues at $9.9 billion for the quarterly report prior to the open on November 21, though still down from last FQ3. The key here is understanding the current numbers are likely the worst-case scenario in the new normal for Best Buy with the Fed pausing interest rate hikes and any recessionary period finally expected to be resolved in the next few quarters.
Holiday sales are expected to remain solid at 3% to 4% , but stretched consumers spending far more on food aren't likely to line up for a new computer. Even Apple (AAPL) recently reported that Mac and iPad sales were exceptionally weak in the September quarter and guided to overall weak numbers in the holiday quarter signaling electronic sales aren't rebounding yet.
Over this holiday period, the best investors can expect is an end to the persistent period of giving back sales from the Covid period. The current consensus estimates have Best Buy producing a small revenue gain of 3% in FQ4 followed by flat numbers for FY25 leading to EPS growth in future years. Unfortunately, the prime reason the retailer will report some growth in the current quarter is the $700 million revenue forecast for the 53rd week in FY24.
EPS Boost
Under the worst-case scenario, Best Buy appears poised for flat revenues going forward producing massive cash flows. The company can use those profits and cash flows to repurchase shares on the cheap.
Business has been tough for the last couple of years, but Best Buy keeps cutting share counts via share buybacks. Best Buy had over 260 million outstanding shares back to start 2021 and the count is now down to only 219 million.
The electronics retailer bought $200 million worth of shares in FQ2 alone after repurchasing a similar amount in the prior quarter. The company announced plans to repurchase a larger amount of shares in the 2H. An amount equal to $500 million would equate to over 3% of the outstanding shares cutting the share count by another 6+ million.
All of these shares buybacks are occurring while Best Buy offers a 5.4% dividend yield for patient investors. In normal times, this large dividend yield would be enough to entice investors.
The company only has $1.1 billion in cash and a similar amount in debt. Best Buy is in the 6-month period where cash flows surge providing the money needed for larger capital returns.
The key here is that Best Buy is repurchasing all of these shares while the stock is cheap. The stock only trades at 10x forward earnings while analysts forecast earnings growth in future years with management forecasting 6% to 7% in share buybacks in FY24 contributing to EPS growth in FY25 with the same net income level.
Any signs the holiday period would be better than expected will naturally send the stock soaring. Right now, Best Buy only needs stability in sales to reward shareholders with the large dividend yield providing immediate cash and the share buybacks helping to boost future EPS.
Takeaway
The key investor takeaway is that Best Buy remains priced for general retail sector weakness. The upside for investors is the retailer guiding holiday sales above consensus estimates. The most likely scenario is that Best Buy maintains tepid forecasts for future periods and the company repurchases shares on the cheap until the business returns to growth. Either way, shareholders are collecting a large dividend and the company is building a path to higher profits.
For further details see:
Best Buy: Still A Great Buy Heading Into Tough Holidays