Because of the market’s general bearishness throughout 2022, it’s not unusual to see a lot of stocks, including very well-known names, near historical lows. In some industries, it’s also not surprising to see some stocks breaking below previous lows to establish new ones.
Since 2020, one of the surprising stories is the way that a lot of traditional, brick-and-mortar retail companies have found creative ways to shift their operations to work in a COVID-restricted world. Many of these companies found ways to leverage technology to expand omnichannel sales and delivery methods that helped to keep demand for their goods healthy throughout the pandemic. That was a big factor that helped these businesses buck the expectation of slowing sales and profitability to demonstrate healthy balance sheets, robust cash flows, and improving operating margins.
The last year has shifted the narrative a bit away from COVID and onto the reality that those same stimulus programs pushed inflation to levels not seen in the last four decades. Issues that existed prior to the pandemic, like limited chip supply in the Semiconductor industry, along with concerns that began with the health crisis, like labor shortages have all compounded to create extended supply chain issues that have helped to push inflation indicators even higher. Add to the mix Russia’s invasion of Ukraine and all of the human and geopolitical damage that has caused, and you have a pretty toxic mix of global economic issues that have led to rising inflation and resulting high consumer costs that have prompted central banks around the world (and the Fed in particular) to raise rates on an increasingly aggressive basis.
The economic questions I’ve just described put Specialty Retail industry in what could be a dangerous spot, which is why it isn’t too surprising that a lot of well-known names in the industry are significantly below their 2021 highs. That includes Best Buy Co (BBY). BBY resides in an intensely competitive landscape that was already fierce, but that has been under more and more pressure for a number of years from inroads made by Amazon (AMZN) in its digital and technology-centric offerings while still facing intense competition from big-box retailers like Walmart (WMT) and Target (TGT). That is a symptom of what has become a clear, long-term, “sea change” kind of shift by consumers away from traditional brick and mortar stores to online shopping alternatives.
BBY has been working hard to stay relevant amidst that change, and many of those changes are what enabled the company to succeed during the last two years. This is a company with some interesting fundamental strengths including a very solid balance sheet, manageable debt and free cash flow and an attractive dividend. The stock has dropped more than -50% from its November 2021 peak and appears to be looking for a new, stabilizing support level. Does that drop represent an opportunity to get in at a good value price for long-term investors, or would it smarter to wait? Let’s find out.
Fundamental and Value Profile
Best Buy Co., Inc. is a provider of technology products, services and solutions. The Company offers products and services to the customers visiting its stores, engaging with Geek Squad agents, or using its Websites or mobile applications. It has operations in the United States, Canada and Mexico. The Company operates through two segments: Domestic and International. The Domestic segment consists of the operations in all states, districts and territories of the United States, under various brand names, including Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater, and Pacific Kitchen and Home. The International segment consists of all operations in Canada and Mexico under the brand names, Best Buy, bestbuy.com.ca, bestbuy.com.mx, Best Buy Express, Best Buy Mobile and Geek Squad. As of December 31, 2016, the Company operated 1,200 large-format and 400 small-format stores throughout its Domestic and International segments. BBY’s market cap is $15.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by -48.32%, while also dropped by -12.83%. In the last quarter, earnings were almost -2% lower while sales also declined by about -3%. BBY operates with a very narrow margin profile that has weakened somewhat. Over the last twelve months, Net Income was about 3.6% of Revenues, and dropped in the last quarter the number to 2.96%.
Free Cash Flow: BBY’s Free Cash Flow over the last twelve months was $824 million. That translates to a Free Cash Flow Yield of 5.39%. The current number marks a decline from $2.5 billion three quarters ago.
Debt to Equity: the company’s debt to equity ratio is .41, a very low number that reflects the company’s biggest strength, which can be seen in its balance sheet, which shows $840 million in cash and liquid assets against a little under $1.2 billion in long-term debt. Cash has declined over the past year, from $3.4 billion position, and along with the decline in Free Cash Flow is a concern moving forward, however their debt is manageable. The quarters ahead will help determine if the declines in Net Income and Free Cash Flow can be reversed; if they continue to decline then debt service could become an issue.
Dividend: BBY pays an annual dividend of $3.52 per share, which translates to an annual yield of about 5.18% at the stock’s current price. It’s worth noting that BBY has increased their dividend from $2.00 at the end of 2019, $2.10 in 2020, and $2.80 earlier this year. The ability to raise its dividend over the last two years is a notable sign of strength that shouldn’t be dismissed, even with the other current concerns I already mentioned.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $39.25 per share. That suggests that even with the stock’s long-term downward trend, BBY is significantly overvalued, with -42% downside from their current price and a useful discount price at around $31.50. It is also worth noting that this same analysis yielded a “fair value” price at around $67 at the end of 2021.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action: This chart represents BBY’s price activity over the past year. The red diagonal line traces the stock’s fall from its $142 high in November of last year to its low, reached about a week ago at around $62.50. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Current support is at around $62.50, with immediate resistance at about $68.50. The stock is nearing resistance right now; a break above that level should see upside to about $74.50 before hitting next resistance. A drop below $62.50 could see downside to about $56.50, based on the current distance between support and resistance levels.
Near-term Keys: If you’re looking for a value-based, long-term investment, BBY is a long way away from fitting the bill. The stock would need to drop to somewhere around $31.50 – or show significant improvement in its fundamental metrics, including Free Cash Flow and Net Income, before a stronger value-based argument can be made. If you’re looking for a short-term opportunity, however, there are a couple of signal points that could be useful. A push above resistance at $68.50 could act as a good signal to consider buying the stock or working with call options, with a short-term, momentum-based target price at around $74.50 per share. If the stock drops below current support at $62.50, you could also think about shorting the stock or buying put options, with an eye on $56.50 as a useful profit target on a bearish trade.