Is Best Buy Undervalued?

[KwanG]

Ticker:                                     BBY
Company:                                Best Buy
Stock Price (as of 30 July 10):  $34.66
Fully Dilute S/O:                      421

Market Cap:                             $14,600
Plus Debt:                                $1,290
Plus Preferred:                        $0
Plus Minority Interest:              $639
Less cash:                                ($1,444)
Total Enterprise Value:            $15,085

Overview:

-Best Buy (BBY) is the #1 consumer electronics retailer in the U.S., with annual sales of $50 billion in a $175bn industry representing nearly 30% market share.

-BBY currently has a market cap of $14.6 billion (or 0.3x sales), Projected EPS growth of 10.5% implies a P/E/G of 0.8x Dividend yield is 1.7

-BBY trades at 10.1x 2010E P/E, compared to 12.8x for WMT and 45x for AMZN.

United States (95% of Income):

-The Company has 1,117 stores in the U.S. as of 1Q10. BBY has several high-margin services including Geek Squad (6 stand alone stores), Magnolia home theatres (8 stand alone stores), Best Buy Mobile (74 stand alone stores), and 35 Pacific Sales locations.

International (5% of Income):

-Best Buy does not yet have a strong international presence, as shown by the Intl segments 5% of operating income.

-Internationally the Company has 2,830 stores as of 1Q10. Note that 2,430 of those stores are Carphone Warehouse locations in Europe, which BBY invested $2.1bn for 50% stake in Carphone Warehouse in 2008. The Company invested in Carphone in order to make a move into Europe, where they will take on Europes incumbent retailer DSG International (owns PC World and Currys). BBY will open 5 stores in London in 2010.

-The remaining international stores are 158 Five Star locations, 70 Best Buy/Mobile in Canada, 7 Best Buy in China, 144 Future Shops, 5 Best Buy in Mexico, 1 in Turkey.

-Approximately 75% of products sold by BBY is related to Consumer Electronics (LCD TVs, digital cameras, etc.) and Home Office (mobile computing, mobile phone). 1Q10 decrease in Entertainment Software is related to industry wide softness in video games sales. BBY also recently announced plans to expand into the used video game rental business, aimed at stealing business from GameStop (GME).

Comment from seeking alpha:

We like the risk/reward of BBY at 10x 2010E P/E. BBY is trading at a lower multiple due to recent earnings miss. however, BBY management maintained its full year outlook, and we believe going into back-to-school fall period and end of year holiday season (all retailers are seasonal), BBY will significantly rebound from current levels.

Source: Seeking Alpha