Best Buy Co Inc (NYSE:BBY) investors don’t like Investor Days.
Maybe that’s why management has so few of them.
In Tuesday morning trade, BBY stock dropped big ahead of the company’s first Investor Day in 5 years. The stock is reacting negatively to what investors are perceiving as unexciting long-term guidance. Revenues are expected to grow roughly 2% per year to $43 billion by 2021, while earnings are expected to grow between 8-9% per year to $4.75-$5.00 by 2021.
Investors didn’t like those targets. BBY stock fell more than 8% in response to the long-term guidance.
But we’ve seen this rodeo before. As Best Buy CEO Hubert Joly pointed out, after the company’s last Investor Day in November 2012, BBY stock dropped some 20% over the next couple weeks to $11 and change.
That turned out to be a great buying opportunity.
From those mid-December 2012 lows, BBY stock has rallied 340% to $53 as of Friday’s close. The S&P 500 is up just 75% in that time frame.
I think we have another compelling buying opportunity forming here. Best Buy is a company getting its act together in this rapidly evolving retail landscape, and BBY is a stock that remains grossly undervalued.
I say buy this dip.
Best Buy’s Long Term Targets Are Pretty Good
Here’s the thing: for a brick-and-mortar retailer, Best Buy’s long-term targets are really good.
The long-term guide implies just over 2% annualized revenue growth over the next several years. That is pretty good for a fully built-out brick-and-mortar consumer electronics retailer that isn’t relying on new stores to drive top-line growth. In fact, it’s really good because it implies positive comparable sales over the next several years.
Positive comps are a rarity in bricks retail, but not at Best Buy — positive comps are becoming the new norm.
This speaks to Best Buy’s competitive moat and secular growth prospects. Best Buy sells the type of stuff that requires an in store-visit, either because of its big price tag (think home theater) or its technological novelty (think smart home). When spending big, consumers naturally want to know what they are getting for their buck. When buying new tech, consumers naturally want to know how to appropriately use that tech.
This dynamic will exist in perpetuity. So long as new consumer tech enters the market, and so long as some consumer tech pieces carry big price tags, Best Buy’s physical retail locations will continue to serve a purpose.
Hence, low single-digit positive comp growth is here to stay.
Meanwhile, the long-term guide also implies operating margin expansion from 4.3% in 2017 to 4.5% in 2021. That isn’t much margin growth, but, again, margin expansion is a rarity in bricks retail. The fact that BBY can leverage operating expenses behind a growing revenue base in this troubled bricks retail world is a testament to the company’s enduring business model.
Overall, earnings are expected to grow between 8-9% per year over the next several years. Meanwhile, BBY stock trades at only 13 times this year’s consensus earnings estimate.
A 13-times multiple for roughly 8.5% earnings growth is about as good as it gets in the retail world.
Target Corporation (NYSE:TGT) is trading at a similar valuation (13 times this year’s earnings estimate), but long-term earnings growth prospects are actually negative. Wal-Mart Stores Inc (NYSE:WMT) has a much bigger multiple (18.3 times earnings) for lower growth (~6%). Home Depot Inc (NYSE:HD) has bigger growth prospects (~13%), but also a much bigger multiple (21.5 times earnings). TJX Companies Inc (NYE:TJX) has similar growth prospects (~10%), but it also has a far bigger multiple (18.6 times earnings).
Bottom Line on BBY Stock
Of the headline brick-and-mortar retailers, I like BBY the most.
Comparable sales are positive — and they will remain positive thanks to strong trends in new consumer tech. Revenue scale will drive some margin expansion. Earnings growth will be strong and steady.
And, yet, BBY stock is still dirt cheap at only 13 times this year’s earnings estimate.
I think this is a great opportunity buy the dip. This stock can very realistically make another huge run from these levels.
As of this writing, Luke Lango was long BBY, TGT, HD, and TJX.
