- Macroeconomic headwinds, including declining consumer confidence and elevated energy prices, have been driving down BBY's stock price.
- Although we believe that these headwinds are temporary, due to the near-term uncertainty, there may be further downside risk ahead.
- Both BBY's valuation and the safe and sustainable dividend payments could make the stock attractive for dividend and dividend growth investors.
- We maintain our "hold" rating on BBY.
In our previous article in June 2022, we listed some of the pros and cons of investing in Best Buy Co., Inc. ( BBY ). The primary focus of the article, from a positive perspective, was on BBY's strong track record of growth, its safe and sustainable dividend payments combined with share buyback programs, the improving efficiency of the firm, and its valuation. On the other hand, the main cons mentioned were: weaker than expected guidance for 2022 and a set of macroeconomic headwinds including consumer confidence.
Since the publication of our writing, BBY's stock price has fallen about 7%, about in line with the decline of the broader market.
In this article, we will take a deeper look at how BBY has actually been performing in the last 20 years during periods characterized by low consumer confidence to gauge what the short-term performance of the stock may be.
Performance during times of low consumer confidence
Consumer confidence is a leading economic indicator, which is often used to forecast potential changes in the consumer spending behavior in the near term. A declining confidence is often a signal that consumers are getting more and more uncertain about their financial outlook and are becoming more reluctant to spend larger sums of money. Such behavior could have a pronounced impact on the demand for durable, discretionary, non essential goods. The demand for certain services may also be impacted, if the consumers have a wide variety of lower cost alternatives and the switching costs are low.
Although consumer spending has remained high in the first half of 2022, consumer confidence in the United States has been steadily declining.
In our opinion, such low consumer confidence level is likely to impact spending in the near future. As Best Buy is selling mostly durable, discretionary products, we expect a decrease in demand for the goods that they sell.
But let us actually take a look at how BBY and its stock has performed during these periods, historically. These periods are marked by the red circles on the graph above.
2001-2003
During this two-year period, BBY's stock has substantially outperformed the S&P 500 ( SPY ) - its stock price gained more than 22%, while the broader market declined by as much as 33%.
The stock price increase in the time frame was justified by the fact that BBY managed to increase both its revenue and earnings, despite the decline in consumer confidence.
The firm's financial performance in the 2007-2010 period, however, was slightly worse.
2007-2010
The poorer financial performance was also reflected in the stock price. Although BBY had performance largely in line with the broader market during this time period, it lost about 20% of its market cap.
2011-2013
Undoubtedly, the firm has significantly underperformed between 2011 and 2013, losing about 66% of its market value. It is also linked to that fact that in 2012, the firm's earnings dropped by almost 68%.
In 2022, Best Buy's stock has declined by 25% year to date. This can be explained by the macroeconomic headwinds, declining sales, and the weaker than expected guidance for 2022. In our opinion, additionally to the declining consumer confidence, the diminishing of COVID-19 related-trends could be another key driver of slowing sales. For example, during the pandemic, many people purchased electronic devices to equip their home offices, which undoubtedly led to an increase in demand for BBY's products. However, as people are gradually returning to the office, this catalyst is slowing disappearing.
All in all, we believe that many of the headwinds that are driving the stock price down are temporary. While in the near-term there may be further downside risk, with moderating energy prices and inflation, we expect demand to recover and result in improved financial performance in the long term. Although capital gains may not be a source of significant return in the near term, the safe and sustainable dividend payments can be attractive for investors looking for a periodic income stream.
For these reasons, we maintain our previous hold rating on BBY's stock.
Valuation
In our previous article, we mentioned that BBY appears attractive from a valuation point of view. We would like to highlight once again that the stock is trading at a historically low price-to-earnings multiple.
Even when revenue was steadily declining between 2011 and 2015, the firm was still trading at a substantially higher multiple than currently. One could argue that the firm currently has less growth potential, but we believe that the recent acquisitions that BBY made, Current Health and Yardbird in 2021, combined with an improving macroeconomic environment could propel growth in the years to come.
Although the firm looks undervalued, we still cannot rate it as a "buy" due to the macroeconomic uncertainty in the near term.
Key takeaways
Attractive valuation combined with a safe and sustainable dividend makes BBY stock an attractive candidate for investors looking for periodic income streams.
Due to the declining consumer confidence and macroeconomic uncertainty in the near term, however, we believe that further downside risk may exist.
For these reasons, we maintain our "hold" rating on BBY.
For further details see:
Best Buy: The Headwinds Are Temporary