Best Buy Stock: Sell-Off Presents Buying Opportunity (NYSE:BBY)

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best buy (NYSE: BBY) is one of the leading suppliers of technology products, offering a wide range of consumer electronics, home appliances and entertainment products. It is also one of the biggest Consumer electronics retailers in the United States. BBY is currently facing headwinds from its management’s downside forecast for the broader CE industry, which erased a 36% gain from last September’s sharp rally. Revisiting this stock after my first article on how BBY leverages its online sales, it’s become even more attractive given its growing yield and management’s strong buyback recommendation. BBY continues to capitalize on growing technology trends and expands TAM with the recent acquisition of Current Health Ltd. Management has provided a clear path to its 2025 goals and has assured its investors that the company is on track to have a record-breaking 2025 fiscal year. Despite numerous expert downward revisions to its top line, BBY still generated a healthy cash flow and improved its liquidity status. Temporary industry headwinds and the current off-season justify BBY’s potential decline, but also offer investors an opportunity to buy this stock at a better price.

Accelerated too fast?

Traditional consumer electronics are big and growing

Traditional consumer electronics are big and growing (Best Buy)

One of the bearish catalysts for BBY is its slowing non-GAAP operating income and diluted EPS, which management is forecasting on a full-year basis. According to them, they expect a non-GAAP operating margin of around 5.4%, breaking the 5-year growth streak.

BBY: Non-GAAP Operating Margin

BBY: Non-GAAP Operating Margin (Company Records. Prepared by InvestOhTrader)

As a result, while the company is forecasting a possible peak in its operating profitability in the next fiscal year, it will still achieve levels of performance above those of its pre-pandemic days. Aside from management’s forecast of a slowing CE industry, supply shortages and persistently higher input costs due to inflation triggered by the Russia and Ukraine crises, the company is aggressively investing in digitalization and putting pressure on its operating margin in 2023, the company assures Management investors said the decline isn’t the result of operational weakness, and their Totaltech investment is touting a customer-centric approach that will set them apart from the competition.

Looking ahead to FY25, we expect the CE industry to return to the high levels we saw in FY22 and for Totaltech to drive significant growth. Source: Q4 2022 earnings call

BBY: Unique ecosystem

BBY: Unique ecosystem (Best Buy)

One of its key goals is to capitalize on emerging and rapidly changing technology trends, as well as leverage its online presence to accommodate the shift in consumer shopping behavior towards e-commerce. They are building a unique customer experience that will drive sustained revenue growth with their new Best Buy Totaltech membership program. According to management, this strategy will cost the necessary marketing expenses that will eventually result in significant sales that will lead to increased operating income in the future. How meaningful? According to management:

At Totaltech, we believe that the combination of member revenue and incremental purchases by members will add approximately $1.5 billion in revenue by FY25 compared to FY23. Source: Q4 2022 earnings call

A distance

On the way to online sales

BBY: Declining number of stores

BBY: Declining number of stores (Company Records. Prepared by InvestOhTrader)

One of BBY’s most notable trends is the declining number of stores and management’s continued plan to close 20 to 30 stores annually through 2025. Given that metric and management’s slowing guidance for a comparable revenue decline of between 1% and 4% next fiscal year, in addition to its highest non-GAAP operating margin, that’s enough to pull the price down. However, the declining number of branches is in line with their strategy as they shift their focus to online operations and virtual branches.

Our outlook is to close 20 to 30 stores per year through FY25. This assumption reflects our belief that the online channel mix will grow to approximately 40% in FY25. Source: Q4 2022 earnings call

BBY is relieved of associated fixed store rental costs, which can help ease pressure on operating margins during uncertain times. Additionally, despite the declining number of stores, the company increased its workforce base and shifted to variable spend. As of fiscal 2022, the company has 105,000 employees and 50% of them work full-time, up from 102,000 in fiscal 2021, of which 60% work full-time. In summary, I don’t think BBY is experiencing any inefficiencies and the slowdown in comp sales growth due to aggressive store closures is temporary.

On the way to health technology

BBY: On the way to health

BBY: On the way to health (Best Buy)

Another value catalyst from BBY is its growing TAM thanks to the acquisition of Current Health Ltd. BBY now has a health tech skin and is expected to unlock an $80 billion market opportunity. According to management, they see increasing demand for virtual care and hospital care at home over the next few years as quoted below.

By 2025, an estimated $265 billion in Medicare benefits will be transferred to the home, and 61% of patients say they would choose hospital care at home.

BBY: Health Opportunity creates a momentum driving growth in all 3 focus areas

BBY: Health Opportunity creates a momentum driving growth in all 3 focus areas (Best Buy)

It’s also one of the reasons I believe the declining operating margin guidance is not due to operational inefficiencies. As shown in the image above, management expects the company to be dilutive through fiscal 2025 and expects annual growth of 35% to 45% and then positive contribution in fiscal 2027.

Still cheaper than its competitors and discounted cash flow

BBY: Relative rating

BBY: Relative rating (Data from Seeking Alpha. Created by InvestOhTrader)

Conn’s, Inc. (CONN), Rent-A-Center, Inc. (RCII), GameStop Corp. (GME), Carvana Co. (CVNA), Ttractor Supply Company (TSCO)

BBY is relatively cheaper than its peers, both on the overall average and excluding CVNA and TSCO. The company’s sales are under pressure due to supply chain shortages as well as a potential staffing issue due to Covid-19. Experts forecast a -2.84% decline in revenue in FY2023 to $50.29 billion, which translates to the forecast future P/S of 0.47x and the forecast EV/revenue multiple of 0, 49x impact. Examining its trailing P/E of 10.35x, it is relatively expensive compared to its forward P/E of 11.31x. However, considering the 5-year moving average of 15.47x, the trailing P/E remains quite attractive.

BBY: 5 years DCF model

BBY: 5 years DCF model (Created by InvestOhTrader)

I’ve adjusted my model a bit for today’s weakness, although I think this is a very conservative approach as management has provided a positive outlook beyond fiscal 2025. Going forward, based on my DCF model, BBY should trade near $133 which still has significant upside potential. If I continue to project it out to 10 years at a 1.5% compound annual growth rate, I believe Streets’ price target of $150 is achievable.

BBY: 5 years DCF model

BBY: 5 years DCF model (Data by SeekingAlpha. Created by InvestOhTrader)

I have completed my DCF model using the analysts’ forecast values. I have lowered my future operating margin guidance as there is no reason to be overly optimistic given current market conditions and the uncertainties surrounding the recent acquisition and other recent developments. Additionally, given the company’s projected free cash flow, it’s not surprising that its future dividend payment will increase, on top of the company’s planned $1.5 billion share repurchase in the next fiscal year.

BBY: 5 years DCF model

BBY: 5 years DCF model (Data from Seeking Alpha and Yahoo! Finance. Created by InvestOhTrader)

The table above shows my WACC calculations and selected historical data from the company I used to complete the model.

Last Key Takes: Another opportunity to add

BBY: Weekly chart

BBY: Weekly chart (Trade View)

Looking at today’s price action, the 20-day and 50-day simple moving average shows bearish sentiment. Any further decline would raise the company’s expected dividend yield to 3.46%, which is currently higher than the S&P 500’s trailing dividend yield 1.35%. If it breaks its current support level of $94, it could force the price to retest the $76-$85 range, which I believe will act as a strong support zone.

BBY enjoys an upgraded credit rating from Moody’s to BBB+ in fiscal 2022, up from BBB in the last fiscal year. Its focus on improving macro trends in the information technology and healthcare industries positions the company well to weather today’s uncertainties. Therefore, BBY is still a Buy on its potential decline.

Thank you for reading!

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