Why Best Buy's Jump is Just the Beginning
Investors breathed a sigh of relief on Tuesday morning when Best Buy (NYSE: BBY) delivered a fairly impressive quarter. Shares, which had been close to a 52-week low, are up more than +6%. Were it not for the large group of investors that see real danger in the consumer economy, shares would have posted even stronger gains. Six months from now, when Best Buy is discussing holiday season sales, those concerns should be officially put to bed. Meanwhile, shares are awfully cheap, which sets the stage for one of the best retail plays ahead of the holiday season.
Before we look ahead, it's important to see what is driving profits in the near-term. To be sure, consumer spending remains cautious: same-store sales fell -0.1% in the quarter, which is actually below the +2% growth rate in consumer incomes seen in recent periods. There is also a dearth of hot new items that consumers must own right now.
Best Buy is also gearing up for a big push this fall into mobile devices. Major wireless phone companies are expecting to start rolling out high-speed 4G phone services in major cities. There's more: video game sales have been in a funk recently, but a new gaming platform from Microsoft (Nasdaq: MSFT), known as Kinect, is expected to be released this fall. Add it all up, and consumers will have ample reason to visit stores as we head toward the holidays.
Despite heavy investments to prepare stores for these new electronics segments, Best Buy deserves kudos for tightly controlling expenses. Quarterly profits of $254 million ($0.60 a share) were more than +50% above year-ago levels. Analysts thought Best Buy would earn only $0.44 a share.
Action to Take --> Focusing on recent expense controls or near-term product releases obscures a much larger point. Best Buy is the destination for consumer electronics, especially as several key rivals have gone out of business. Walmart (NYSE: WMT) will always present formidable competition, but there's ample room for both of these firms to profit.
Best Buy trades for around 10 times (likely upwardly revised) fiscal (February) 2011 profits, and shares represent the best of both worlds: near-term value and long-term growth. Despite today's surge, shares are a long way from fair value. I expect shares to move past the 52-week high of $48, either this fall in the face of a robust holiday season, or in 2011 as consumer spending finally picks up.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.