Best Buy's Best Deal: Its Stock

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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