Beruflich Dokumente
Kultur Dokumente
NYSE: BBY
Last updated: Nov. 1, 2005
Recommendation
BUY
Pricing
Current Price
52-Week High
52-Week Low$31.93
$44.20
$53.17
Executive Summary
As the nations largest retailer of consumer electronics, Best Buy looks to be an
attractive choice for investors. Best Buy is aggressively expanding into new markets and
solidifying their presence where they currently operate. Best Buys beta is higher than
the portfolios average beta, but does not show signs of any significant declines in value
in the near future. Now is an excellent time to purchase Best Buy stock because it is the
beginning of the Christmas buying season, a time that the stocks value has increased
every year for the past eight years. The mean one year target for Best Buy stock is
$53.97, and most analysts believe it will easily achieve this target. Earnings growth over
the past decade has averaged 36%. Sales growth has also consistently outperformed the
industry with an average of 19.6%.
My recommendation for Best Buy is to buy. This is also the opinion of most
analysts. Best Buys stock rating on Yahoo! is 2.1, buy. The following is a list of pros
and cons to purchasing and holding Best Buy in the portfolio:
Pros
-Market leadership-Best Buy is the market leader for consumer electronics.
-Diversified-Best Buy sells everything from batteries to computers to washers and dryers.
-Rapid, sustainable growth-Analysts predict a growth rate of 13-18% per year for the next
5 years.
-Solid performance record
Cons
-Beta is higher than portfolio average and would raise the portfolios beta
-Somewhat cyclical-the company goes through periods of low sales throughout the year
-Somewhat sensitive to economic conditions
Success in the Christmas buying season is critical for Best Buy to make revenue
and profit targets. By operating in more markets and being able to outperform all other
major competitors, Best Buy looks to be the dominant player in the market for years to
come.
Company Description
Best Buy is a Fortune 100 growth company and retailer of consumer electronic
goods, selling products ranging from small personal electronics accessories to major
office equipment and household appliances. The company operates stores and websites
under the following names: Best Buy, Future Shop, Magnolia Audio Video, and Geek
Squad. Best Buy also operates an eBay outlet. The future Shop and Magnolia Audio
Video are smaller market stores specializing in narrower product segments. The Geek
Squad operates in Best Buy stores as a computer help desk that services computers and
peripherals. Best Buy was founded in 1966 by Richard M. Schulze as Sound of Music,
Inc. The name was changed to Best Buy in 1983. The company is headquartered in
Richfield, Minnesota. There are currently 850 stores including 830 U.S. Best Buy
locations. Best Buys current expansion goal is to open 62 new stores in fiscal year 2006
and 58 stores for FY2007. Best Buys target market is upscale suburban moms and any
young, tech savvy consumer in middle to upper middle income class. Best Buy is
currently focusing on sales of DVD movies and small, personal electronic devices. Best
Buy is the number two seller of Apples iPod, behind only Apple itself. iPod has
contributed to a significant increase in store traffic as well as revenues from MP3 players.
Best Buy is currently in the process of redesigning all of its stores to be customer
centric, meaning that they are focusing efforts to put people first and products second.
The goal is to make stores simple to navigate as well as pleasant and easy to shop.
Best Buy is governed by a 12 person Board of Directors that over sees its top
management team that consists of the CEO, President, CFO, COO, 8 executive vice
presidents and two senior vice presidents. Below this top management team are regional
and district managers that are each in charge of several stores, depending on the market.
Each store has a general manager, assistant manager and several department managers.
Kevin T. Layden
President and COO
Best Buy Canada
Michael A. Linton
Executive Vice President
Consumer and Brand Marketing
and Chief Marketing Officer
Michael London
Executive Vice President
Sourcing and Alliances
John C. Walden
Executive Vice President
Customer Business Group
Robert A. Willett
Executive Vice President
Operations
Susan S. Hoff
Senior Vice President and
Chief Communications Officer
Joseph M. Joyce
Senior Vice President
General Counsel and
Assistant Secretary
the climate of the market, such as the plasma TV. But when these innovations arise Best
Buy is ready and simply integrates them into their product offering.
Best Buy is currently growing at a phenomenal rate. With hopes of adding more
than 100 stores over the next two years and sustained 36% annual growth over the past ten
years, Best Buy is solidifying its position as the market leader in the electronics and
household goods industry. In addition to expanding into new markets, a 10.2% yoy growth
in revenues is a strong sign of continued success.
More than 80% of the products that Best Buy sells are manufactured in various
Asian countries, including China. China looks to become an attractive trading partner in
the near future as they are turning to a more capitalistic economy. This will offer many
benefits to electronics marketers as they will now be able to achieve more competitive
prices from Chinas assembly plants. Best Buy will in turn be able to purchase products
from their suppliers at a lower cost and will be able to achieve higher margins.
In the past, Best Buys pricing structure has been relatively consistent. They hold a
great amount of power in their supply chain and can negotiate the best possible contract
conditions. Best Buy generates more sales than other competitors and can achieve greater
economies of scale in their operations, resulting in stable sales, pricing, and profits. The
primary factor affecting prices is industry competition. Best Buy generally offers the
lowest prices and as a result may realize lower returns. Economic conditions do have some
effect on products however. As more and more technological advances occur, the prices of
existing technologies are drastically reduced. This can be observed in the pricing of plasma
TVs. Five years ago, there were no plasma screens for less that $10,000. Today, they are
selling good quality units for less than $3,000. However, inflation is a factor as with all
goods. A 1-3% price increase for similar goods, utilizing the latest technology can be
expected. Also during times of crisis, such as after Katrina and Rita when oil and
transportation costs increase, prices may reflect as such.
35% of Best Buys operating profit goes toward tax expense. In FY 2005, Best Buy
paid $509 million in taxes on $1,443 million in profit from continuing operations. This is
the typical tax bracket for a corporation of this size.
Best Buys domestic competition consists of any avenue of purchasing consumer
electronics. The primary competition consists of Circuit City, Radio Shack, Wal-Mart,
Dell, Sears, and Ultimate Electronics, and as of late American. Best Buy also views home
improvement stores, video wholesale clubs and rental stores, mass merchants and other
small specialty retailers as competition as they all compete for consumers discretionary
income. Exhibit 1 below shows market share, comparing Best Buy to Circuit City and
Radio Shack. Wal-Mart, Sears and Dell were excluded because there are no figures
indicating what portion of their business comes from electronics products, and what portion
of Best Buys revenue comes from computers.
The threat of new entrants into the electronics industry can be considered medium.
New businesses are opening at a rate of more than one every day in this industry, but the
threat of them taking any significant sales from Best Buy is low. The capital requirements,
relationships, and industry knowledge to succeed as Best Buy has, create high barriers to
entry in the market and thus have helped Best Buy to entrench its position. Foreign
competition could become a threat in the future, in the U.S. Best Buy operates primarily in
the U.S. with some stores opening in Canada. There is little to stop a foreign competitor
except for Best Buys brand equity. Best Buy can leverage its familiar name through
advertising and this alone can discourage many competitors from entering the market. Best
Buy has recently shown its superiority by opening locations within a half-mile of Circuit
City locations and far outperforming this competitor. There have been several instances in
the past 3 years that the Circuit City location has closed down. It is difficult for any
competitor, foreign or domestic to compete with Best Buys market expertise. Below is an
analysis of market share and product groups contributing to revenue.
Company Position
Best Buy has the largest advertising budget of any of its direct competitors. With
annual promotions budgets of $712 million for 2005, $675 million for 2004 and $567 for
2003, Best Buy is able to reach a broad audience. Best Buys advertising consists primarily
of television, and print ads. In major cities, Best Buy runs a several page ad 2-5 times
every week detailing the in-store specials and sales for the current and upcoming weeks.
Best Buy focuses its advertising dollars on promoting products in the bricks and mortar
locations as well as the online store. In addition to traditional advertising, Best Buy also
runs many price promotions such as rebates throughout the year. Starting in 2006, rebates
will be phased out however. In their place, more items will be run on traditional sales.
Running alongside promotional offers, customers participate in a loyalty program in which
they can earn points toward future purchases. In addition to traditional advertising, Best
Buy has a community outreach program through which it generates goodwill by sponsoring
charitable events throughout the country. Best Buy also donates 1.5% of EBIT to various
charitable programs.
In store marketing is the current issue Best Buy is taking on. Currently all locations
are being completely reoriented to be highly customer-centric. The goal is to make
stores easy to navigate, while guiding customers past as many departments as possible
much like a casino. In addition to making the layout better for customers, more services
are now being offered such as complete service for computers, installation of any product
in the store, and a friendly, knowledgeable sales staff. One pleasantry that Best Buy
offers is that its staff is paid salary, not on a commission basis. There will never be any
pressure to purchase. One analysts opinion of this marketing effort is as follows:
We have a buy opinion on Best Buy and a hold opinion on Circuit City. With Best
Buy, over the longer term we expect its customer-centricity initiative will translate into
higher sales and margins. Our 12-month target price is $50. With Circuit City, we have a
12-month target price of $18.
Best Buys pricing policy is very flexible and needs to be as such in the market in
which it operates. Technology is the primary driver of price in the electronics market. As
new technologies emerge, others become obsolete and therefore are less expensive. As
new products are introduced, they take the spotlight, with advertising and promotions as
well as placement in the store. These products are more expensive than their less
technologically advanced counterparts. As mentioned earlier, Best Buy has not had any
serious interruptions in supply or demand that would necessitate a change in pricing
structure. The third quarter of 2005 did however cause some concern as Best Buy lowered
earnings expectations as a result of ongoing costs due to hurricanes Katrina and Rita. Best
Buys prices consistently remain relatively stable and are adjusted primarily based on the
technology being sold. Best Buy, being one of the largest electronics retailers in the world,
is an excellent customer. All major suppliers of electronics look to Best Buy as an outlet of
their goods. Best Buy holds great bargaining power over both suppliers and customers, as
both are many and switching costs are low due to the structure of the industry.
Substitution appears to be of little threat to Best Buy as it is actively engaging its
competitors in various markets. In several markets, Best Buy and Circuit City are located
very close together. In more than almost one-quarter of these markets, Circuit City has
closed its doors or is preparing to do so in the next year. There are very few retailers that
can compete with Best Buy on price, product selection or availability. Best Buy manages
its supply chain very efficiently allowing for volumes greater than any other electronics
retailer.
Technology
Best Buys corporate office maintains buyers specifically to be knowledgeable of
the latest emerging technology. Best Buy wants to offer its customers the newest products
at the best prices. As there is little technology that goes into Best Buys daily operations
(they do not manufacture, but are simply a reseller of goods), there is no chance of a
competitive disadvantage as a result of technology. Best Buy has not conducted any
material research and development in the past three fiscal years, as there is little need. The
biggest technological threat to Best Buy is the new abundance of online retailers. With
little overhead, these businesses can offer the best prices achievable. eBay is another
threat. This online auction website has become quite popular and is becoming a more
trusted name for everything from collectibles to major household purchases. However, the
vast majority of consumers is still wary of major online purchases and chooses to pay
slightly more for the security of a trusted name and a face to talk to should issues arises.
While these online sellers may sometimes be able to beat Best Buy on price, they will
always lag on service, logistics, and a name that has been trusted for over 20 years.
Production, Plant Property and Equipment
As previously noted, Best Buy does not manufacture any of the products it sells.
Manufacturing equipment is not an issue in analyzing operations. Best Buy owns 30.1% of
the buildings out of which it operates and owns all of the in store computers, software, and
operations equipment. The remaining portion of property is on leasehold basis, In fiscal
2005 Best Buy contributed $1.12 billion in leasehold improvements.
Recent Achievements
At Best Buy, customer centricity is about giving employees more power to satisfy the
unique needs of the customers who shop their stores. In 2005 the following goals were
accomplished:
-Completed lab tests and launched a group of 67 stores with successful, scalable elements
of the new operating model
-Expanded Geek Squad to all North American stores, including 24 hr emergency assistance
-Boosted revenues of Canadian stores, incorporated dual branding strategy
-Launched 3 year process of reengineering supply chain, to focus on direct sourcing and
private labels
-Outsourced information technology functions to simplify infrastructure
-Reorganized resources to focus on long term growth, resulting in smaller, closer executive
team
2005
2004
470
2878
375
2851
329
6903
2464
513
40
226
245
2355
343
2607
174
5724
2244
477
37
170
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Total Current Liabilities
Long Term Debt
Long Term Liabilities
Total Liabilities
Stockholders' Equity
Preferred Stock
Common Stock
Retained Earnings
Other Stockholder Equity
Total Stockholder Equity
10294
8652
2824
4959
528
358
5845
2460
4501
482
247
5230
33
952
149
4449
32
836
86
3422
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
Selling General and Administrative
Net Operating Income
Interest Income/Expense
Income Before Tax
Income Tax Expense
Income/Expense discontinued operations
Net Income
Basic Net Earnings Per Common Share
Diluted Net Earnings Per Common Share
2005
2004
27433 24543
20938 18677
6495
5871
5053
4567
1442
1304
1
(8)
1443
1296
509
496
50
(66)
984
705
3.02
2.94
2.18
2.13
(545,000) (725,000)
2,000
66,000
(543,000) (659,000)
(130,000)
14,000
(17,000)
(133,000)
1,000
$686,000
40,000
5,000
45,000
$53,000
2001
2002
2003
2004
YTD
-41.2
-7.5
-32.1
151.9
55.1
163.8
-51.4
-7.6
-29.3
117.4
30.7
88.8
14.6
-4.5
3.8
13.3
11.7
13.2
1 Month
3 Month
1 Year
3 Yr Avg
5 Yr Avg 10 Yr Avg
*
YTD
2.0
1.2
3.2
-10.6
-2.4
-8.3
15.9
9.4
4.6
44.6
19.3
32.6
Stock
+/- Industry
+/- S&P 500
Trailing Total Returns
Stock
+/ Industry
+/ S&P 500
Company
Symbol
Price
15.3
11.1
16.3
Change
31.3
14.4
21.8
13.3
11.7
13.2
Market Cap
P/E
BBY
44.93
+2.11%
22.13B
21.13
RadioShack Corp.
RSH
22.96
+0.04%
3.54B
11.88
CC
18.09
+0.95%
3.29B
50.25
GameStop Corp.
GME
34.38
+0.85%
1.78B
29.51
GTRC
61.76
+1.61%
1.60B
26.72
Conns Inc.
CONN
28.70
+1.41%
672.27M
21.23
Statistic
Market Capitalization
Industry Leader
BBY
22.13B
BBY
BBY
Rank
-
1 / 10
CC
50.25
21.13 5 / 10
CC
1.99
1.16 4 / 10
GME
0.20%
0.10% 4 / 10
TWTR
4.12%
0.23% 5 / 10
GTRC
20.0%
16.0% 4 / 10
RSH
RSH
0.655
0.114 5 / 10
RSH
1.10%
0.70% 2 / 10
35.16% 24.41% 2 / 10
Trend Analysis
The figure below compares Best Buy returns to S&P 500 returns over the past five years.
Current Qtr
Nov-05
Earnings Est
Next Qtr
Feb-06
Current Year
Feb-06
Next Year
Feb-07
Avg. Estimate
0.30
1.16
2.17
2.55
No. of Analysts
22
24
24
27
Low Estimate
0.28
1.11
2.11
2.35
High Estimate
0.32
1.23
2.25
2.80
0.30
1.03
1.91
2.17
Current Qtr
Nov-05
Revenue Est
Next Qtr
Feb-06
Current Year
Feb-06
Next Year
Feb-07
Avg. Estimate
7.35B
10.24B
30.29B
33.77B
No. of Analysts
14
14
20
19
Low Estimate
7.25B
10.15B
26.91B
33.14B
High Estimate
7.43B
10.40B
31.81B
36.00B
6.65B
N/A
N/A
30.29B
10.6%
N/A
N/A
11.5%
Earnings History
Nov-04
Feb-05
May-05
Aug-05
EPS Est
0.29
1.03
0.20
0.38
EPS Actual
0.30
1.03
0.34
0.37
Difference
0.01
0.00
0.14
-0.01
Surprise %
3.4%
0.0%
70.0%
-2.6%
Current Qtr
Nov-05
EPS Trends
Next Qtr
Feb-06
Current Year
Feb-06
Next Year
Feb-07
Current Estimate
0.30
1.16
2.17
2.55
7 Days Ago
0.30
1.16
2.17
2.55
30 Days Ago
0.31
1.16
2.18
2.55
60 Days Ago
0.33
1.18
2.23
2.56
90 Days Ago
0.33
1.17
2.21
2.54
Current Qtr
Nov-05
EPS Revisions
Up Last 7 Days
Next Qtr
Feb-06
0
Current Year
Feb-06
0
Next Year
Feb-07
0
Up Last 30 Days
12
12
Growth Est
BBY
Industry
Current Qtr.
0.0%
14.1%
Next Qtr.
12.6%
14.4%
This Year
13.6%
12.9%
Next Year
17.5%
15.8%
19.8%
N/A
16.0%
14.57%
18.6
18.78
1.16
1.29
43.88
2.14
2.32
0.4346
19.16
1.12
24.41 (ttm)
4.27
0.32 (0.8%)
25.3%
$20.0 Billion
31.93-53.17
1 yr target:
Mean Analyst Rating:
$53.97
2.1 (Buy)
10.43
$28.69 Billion
$2.05 Billion
$1.03 Billion
0.114
1.515
$175 Million
3.76%
5.5%
Analysis of Risk
One point of concern regarding these figures is the stocks beta. 2.32 is much
higher than the portfolio average, however this would be a good stock to hold in
combination with Costco, which has a very low beta. Much of the fluctuation in the stock
price can be explained by seasonality alone and is not caused by any real decrease in
value of the stock. To be said of the other figures, most areas of Best Buys financial
performance look very solid. The stock price is close to the middle of the 52 week range
and looks to be headed in the upward direction very soon as Christmas buying season
approaches. The P/E ratio is reasonable and the stock looks to be somewhat undervalued.
ROE is excellent, as well as quarterly earnings growth, both of which are important to take
into consideration.
Best Buys index membership includes the Standard and Poors 500 as well as the
S&P 1500. The trading location for Best Buy stock is the New York Stock Exchange. The
average trading volume as of 11/1/2005 is 5,307,570. The risk of Best Buy stock is fairly
well limited to within the 52 week range of the stock price. The 52 week change in price is
15.19%. Standard deviation is 7.41. Risk in the securities investments that Best Buy
undertakes is nonexistent as they invest only in government bonds and do no speculative
investing. Best Buys correlation to the market is R squared = 0.4346. This is a relatively
loose correlation and exhibits the fact that Best Buy does not necessarily move as the
market moves.
Fundamental Valuation
These figures were calculated using a risk free rate of 4.75% as has been previously used
throughout the class. The portfolio expected return was established to be 8.87% on Oct
27th; this is the rate used in the following computations. A beta of 2.32 was used. This beta
figure is the average of three analysts estimates (advfn.com B=2.42, bestbuy.com B=2.12,
MSN.com B=2.42).
Required rate of return = .0475+2.32[.087-.0475] = 13.91%
The required rate of return on this stock is so high because of the beta value. By looking at
the beta alone, this stock seems to be fairly risky. However other factors taken into
consideration have shown that the stock is not quite as risky and may even deserve a lower
beta value. Reuters.com rates this stock as having low risk.
V=.42/(.1391-.2041) = -6.46
Payout ratio = 16.4%
The dividend discount model is not an accurate valuation tool for Best Buy as, growth
estimates exceed required rate of return estimates.
P/E Model
P/E Ratio * EPS
19.16*2.14 = 41.00
The P/E valuation method gives a reasonably accurate measure of the stocks actual worth.
Todays price shows that the stock may be slightly overvalued. The causes for this can be
attributed to prevailing market conditions. While according to this valuation technique the
stock appears over valued, the growth that Best Buy is currently experiencing, still makes
this stock a good buy.
Other considerations
On April 27, 2005 the Best Buy board of directors authorized a $1.5 billion stock
repurchase plan. The stock will be purchased from the open market from time to time
when market conditions are acceptable.
In other corporate news, Best Buy is planning to open 20-50 stand alone Geek
Squad locations in urban areas throughout the United States over the next 18 months. This
will expand on the Geek Squad and Best Buy name and become a new profit center.
Institutional Following
TOP INSTITUTIONAL HOLDERS
Holder
Shares
% Out
Value*
Reported
23,663,403
4.81
$1,622,126,275
30-Jun-05
INVESTMENT COMPANY OF
AMERICA
15,792,302
3.21
$1,082,562,302
30-Jun-05
10,425,001
2.12
$714,633,818
30-Jun-05
AMCAP FUND
8,250,001
1.68
$565,537,568
30-Jun-05
4,875,001
.99
$334,181,318
30-Jun-05
4,271,035
.87
$292,779,449
30-Jun-05
4,092,451
.83
$206,013,983
30-Apr-05
3,750,001
.76
$257,062,568
30-Jun-05
3,648,000
.74
$250,070,400
30-Jun-05
3,431,388
.70
$185,329,265
31-Mar-05
Shares
% Out
Value*
Reported
16,547,928
3.36
$1,134,360,464
30-Jun-05
13,418,053
2.72
$919,807,533
30-Jun-05
PUTNAM INVESTMENT
MANAGEMENT, LLC
11,937,437
2.42
$818,311,306
30-Jun-05
11,787,597
2.39
$808,039,774
30-Jun-05
11,305,362
2.30
$774,982,565
30-Jun-05
10,905,463
2.21
$747,569,488
30-Jun-05
10,109,722
2.05
$693,021,443
30-Jun-05
78,727,810
15.99
$5,396,791,375
30-Jun-05
9,141,238
1.86
$626,631,864
30-Jun-05
8,686,951
1.76
$595,490,491
30-Jun-05
Major holders
% of Shares Held by All Insider and 5% Owners:
16%
75%
90%
562
Holder
Shares
ANDERSON, BRADBURY
H.
1,232,355
LENZMEIER, ALLEN U.
1,118,056
SCHULZE, RICHARD M.
481,929
KAPLAN, ELLIOT S.
144,398
TRESTMAN, FRANK D.
62,250
Just over 75% of Best Buy stock is held by institutional investors and mutual funds.
In all there are 562 institutions that currently own Best Buy. Those listed above are the top
ten. Another 16% is held by insiders, which shows that they believe in the company and its
growth potential.
The mean analyst rating for Best Buy is 2.1, down from 2.2 in mid October. 19
analysts opinions were taken into consideration for this rating.
Conclusions
My recommendation for Best Buy is to buy. Holding Best Buy in our portfolio will
result in excellent returns, as has been demonstrated by past performance and growth
potential. While Best Buy has a higher beta than that of the portfolio and may increase
overall risk according to this measure, if it were to be held in combination with Costco or
another big box retailer with a low beta, some of this risk will be diversified and the returns
from Best Buy can still be realized. With the Christmas buying season approaching, now is
the time to move. This is the ideal time to purchase and conditions are favorable to do so.
Since I have begun analyzing this stock it has increase in value by over $3.00 per share. It
is crucial for Best Buy to have a successful Christmas season, as it contributes a large
portion of revenue and profit. Again, my recommendation is to Buy.
Sources Cited
-Best Buy Annual Report
-finance.yahoo.com
-www.advfn.com
-www.bestbuy.com
-www.moneycentral.msn.com
-www.reuters.com
Appendix
The following figures and charts were taken from Best Buys annual report and
finance.yahoo.com. They illustrate information that may be useful to investors in deciding
whether to invest in Best Buy.