This company made my first life profit on the market when they bought back futureshop some years ago. Actually I used to work at futureshop and participated in there employee share purchase program. When best buy bought the company I doubled my initial purchases.

The company
Best Buy Co., Inc. is a multinational retailer of consumer electronics, home office products, entertainment software, appliances and related services. It operates in two segments: Domestic and International. The Domestic segment is consisted of the operations in all states, districts and territories of the United States, operating under various brand names, including, Best Buy, Best Buy Mobile, Geek Squad, Magnolia Audio Video, Napster, Pacific Sales and Speakeasy. The International segment is consisted of all Canada operations, operating under the brand names Best Buy, Best Buy Mobile, Future Shop and Geek Squad; all Europe operations, operating under the brand names The Carphone Warehouse, The Phone House and Geek Squad; all China operations, operating under the brand names Best Buy, Geek Squad and Five Star; all Mexico operations, operating under the brand names Best Buy and Geek Squad and all Turkey operations, operating under the brand names Best Buy and Geek Squad.

With an equity of 6billions comparing to a market cap surrounding 30b best buy cannot be called an asset play. It does have a ‘market advantage’ not written in the books, but if it closes tomorrow, you wouldn’t get your cash back. Then what are the chances of closing. They are about null. They have a clean balance sheet with 15b in current asset for 16b in total liabilities. They will have no problem covering their obligations. They have an history of prudent financials.

Best buy profit are make in the last month of the year. Actually, last year december quarter made a profit of 779m on a full year profit of 1317m. The current TTM is around 3.30 which looks pretty close to pre-recession profits. It may raise a little (10 to 20c) in the next quarter. But based on a profit of 3.30 and a p/e of 14 (same as wall mart the closest competitor) we have a target price of 46. The current price at 34 gives us a MOS of 12$(35%). I actually think that best buy will continue to improve profit margin and total profit with the fall of biggest competitor circuit city.

A co-blogger reported that Bestbuy is an incredibly stable business. In recession bottom it still made 1billion in profit! Far from a loss! Last year it even had a roe of 24%! For barel karsan analysis, follow this link.

International margins are great at around 10% and sales are booming in china.  Mexican market is still undevelopped.  Canada is expanding as BestBuy is opening locations close to best performing Futureshops to acquire almost completly the local market versus local competition. As soon as domestic sales are coming back this company profits will raise alot. I think that a target profit around 4$/share in 2years would be possible. This would give a price per share at a p/e of 14 of 56$. I’ll keep you posted on profit evolution.

Sometimes mr market overreact to news. Last month BBY was trading around 44$ ( close to our target price) but two weeks ago, Best Buy reported operating income that was higher than it was last year, but that missed expectations. I was looking at best buy for the last year for a good entry point. This is mine.

Author as a position in BBY.

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Posted in BBY, NASDAQ

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