By Jack Hough
A plunge in Best Buy stock this past week provides a buying
opportunity ahead of what could prove a lucrative year for
television sales.
The shares lost 14% on Thursday after the electronics chain
reported higher holiday sales but said first-half sales at
long-standing stores could be flat to slightly lower as "the
excitement around high-profile products"--a likely reference to the
iPhone 6--dies down.
Meanwhile, so-called 4K televisions, with definition so crisp
you can count Jimmy Fallon's pores on the Tonight Show, are hitting
the pricing sweet spot: affordable enough to splurge on but also
pricey enough to keep merchants flush.
Rising television sales could extend Best Buy's turnaround. The
stock, under $35, could reach $45 by year's end.
Under new management since 2012, Best Buy (BBY) has used
corporate cost cuts to lower product prices, while improving store
layouts and shipping and in-stock rates for its e-commerce site.
Same-store sales for the recent holiday season rose 2.5%, and
online sales jumped 13.4%, as strength in televisions and mobile
phones offset weakness in tablet computers.
Price cuts at Best Buy have produced a long decline in
merchandise profit margins, but cuts to corporate expenses,
including through layoffs, have helped make up the difference.
Earnings per share for the fiscal year through January are expected
to rise 18% to $2.44. Shares trade at 14 times that figure. Best
Buy holds $4 a share in net cash. The dividend yield is 2.2%.
Prices for many 4K television sets have recently slipped below
$2,000 but remain above $1,000. Historically, say analysts, that
price range has been ideal for both increased adoption and plump
profit margins.
Best Buy's high-end television prices look competitive with
Amazon.com and Wal-Mart in recent surveys. If sales of 4K sets
surge this year, Best Buy's merchandise margin could rebound.
There are other potential growth drivers, including a new online
outlet store that resells returned merchandise. The consensus view
is that Best Buy will increase earnings per share by 9% in the
current fiscal year, to $2.66. By next year, earnings are expected
to approach $3 a share.
A rise to $45 by the end of this year would put the stock at 15
times projected earnings for next year. Cash per share could double
by then.
The stock isn't one to tuck away and forget. Retail remains in
upheaval and the threat from Amazon.com looms large. But Best Buy
shares, especially after their fall last week, appear adequately
discounted for the risk.
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