BBY: Will Best Buy Stock Boom or Bust in Q4?

Will Best Buy Co., Inc.’s (BBY) fourth quarter be a boom or a bust? Heading into the fourth quarter the nation’s economy could not have looked any better.

Best Buy, BBY, best buy stock, BBY stockThe U.S. Department of Commerce reported last week that gross domestic product in the third quarter increased an unexpected 3.9% instead of the 3.5% originally reported. After a tough first quarter, primarily caused by weather, GDP gains in the past two quarters are the best six-month period since 2003!

Looking a little deeper in the report, it shows that consumer spending was revised up from 1.8% to 2.2%, a 22% improvement from the original estimate. With consumer spending accounting for two-thirds of economic activity, this shows good momentum heading into the fourth quarter.

Unfortunately, any gains caused by lower gas prices and an improving labor market may be dampened by slow wage growth as personal income only increased 0.2% in October and real disposable income only increased 0.1%. Consumer confidence is also declining since the summer months, which has prompted some economists to back off from previously forecasted Q4 GDP numbers.

So what should investors expect from Best Buy stock?

Best Buy Stock: Third Quarter Results

Just like the U.S. economy, the third quarter for Best Buy stock was great! BBY almost doubled its profits and the company looked staged for solid fourth-quarter performance. Best Buy has focused its strategy less on pure in-store retail sales and more toward what it calls an “omni-channel strategy,” which it defines as shopping via all available channels.

BBY’s domestic segmented reported a 3.2% increase in comparable stores sales and a 21.6% in comparable store on-line sales change.

Although domestic operations account for over 85% of sales, overall company performance was dragged down by week international performance with international comparable store sales down 3% and international revenue declining 8% to $1.4 billion, primarily due to poor performance in China.

Last year Best Buy’s fourth quarter domestic sales decreased 1.2% and the year before that domestic sales declined 1.4%, therefore BBY is being cautiously optimistic about this year’s fourth quarter and has stated that it expects near flat year-over-year revenue and comparable sales growth. Given the recent economic trends, I think this is a fair assessment.

Best Buy Stock: Growth and Income

Best Buy stock has a consensus price of $43, a 12% premium to its current trading range. Best Buy’s price-to-earnings ratio is 13.48 compared to an industry average of 51, or an S&P 500 average of 18.6.

I frequently use the price-to-sales ratios to help better understand the valuation of retail stocks as it reflects the price I am paying for each $1 of sales the company generates. I consider anything below $1 good and Best Buy’s price to sales ratio is at 0.3, compared to the industry average of 1.1. Best Buy’s price to earnings growth ratio of 1.09 implies a border line neutral to favorable valuation.

In addition to price appreciation, BBY offers a forward dividend yield of 2% on a 24% payout ratio. Best Buy stock price is down year to date but has been showing nice upward momentum since May.

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Source: Yahoo Finance

I understand that BBY is intentionally being conservative with its estimate of the holiday season, but I think it will turn out better than anticipated nonetheless. The company has done a great job bridging the physical and virtual world with in-store pick up and local delivery of products that Amazon and other pure play on-line retailers can’t match.

I think there is more upside to the stock price than analysts are anticipating and the dividend makes it worth holding making Best Buy stock a good growth and income stock to buy.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.

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