Best Buy (NYSE:BBY) reports earnings on Wednesday before the market opens. The Richfield, Minnesota-based electronics retailer has struggled in recent months as lower revenue forecasts and a falling stock price have caused concerns. However, valuations have fallen to near single-digit levels, and the longer-term profit outlook appears brighter. As long as the upcoming earnings report does not hold any dramatic negative surprises, Best Buy stock looks poised to recover the losses suffered in 2018.
Wall Street expects Best Buy stock to post earnings of $2.57 per share. If this holds, it will mean a 6.2% increase from the same quarter last year when the company earned $2.42 per share.
Analysts also project revenues of $14.7 billion. That would mean a 4.3% reduction from the same quarter last year when BBY brought in $15.36 billion.
Analysts credit foot traffic from the Christmas shopping season. They also believe lower tax rates went a long way toward improving profits for both the quarter and fiscal 2019.
For the year, Wall Street forecasts earnings of $5.18 per share, up from $4.42 per share in 2018. This comes amid predicted revenue growth of only 1.5% for the fiscal year. If predictions hold, the company will bring revenue of $42.78 billion for the year.
Best Buy Stock Already Recovering From 2018 Slump
Best Buy stock had seen a steady uptrend since 2013. BBY had become a victim of online retail in the early part of the decade. The stock nearly fell into the single-digits in 2012 as fear of Amazon (NASDAQ:AMZN) and other e-commerce retailers sent the stock plummeting. Since that time, BBY stock benefitted from a turnaround plan that briefly took it above $84 per share last summer.
However, after July, the stock again began to tumble. By Christmas Eve, it had dropped by over 43%. Analysts blamed a generalized selloff in equities as well as cost-cutting to compete with Amazon.
Best Buy stock has since recovered. Still, it trades about 28% below the July high. Now, the question investors will want answered in the upcoming report hinges on whether the company can increase its growth rate. The current increase in profits came in large part from the tax cut. However, this will only serve as a one-time boost.
Best Buy Stock Looks Inexpensive Compared to Peers
The slower profit growth may prove temporary. For the upcoming fiscal year, analysts predict a 6% increase in net income. However, for the next five years, they believe profit growth will average 16.27% per year during that time.
When factoring in the forward P/E ratio of 11.1, Best Buy stock looks like a buy, especially when compared with the P/Es of its peers. Costco (NASDAQ:COST) maintains a forward PE of 26.3. Walmart (NYSE:WMT) trades at about 20 times forward earnings. BBY’s multiple also falls below the 13.1 forward multiple on Target (NYSE:TGT). Even if BBY recovers to its 52-week high, it will still have a P/E below that of Costco and Walmart.
That said, BBY still faces some challenges.
Analyst guidance for the new fiscal year has fallen by two cents per share over the last ninety days. That could show up in the earnings report and temporarily take Best Buy stock down. However, BBY stock has maintained a track record of beating estimates, so I see a departure from the usual pattern as unlikely. As long as earnings, revenue, and guidance do not stray far from current estimates, BBY stock appears undervalued at these levels.
The Bottom Line on Best Buy Stock
The upcoming earnings report for Best Buy stock will likely surprise to the upside if it brings unexpected news at all. Analysts expect profit growth for both the prior quarter and the previous fiscal year. If recent reports serve as an indication, Best Buy will probably exceed estimates again.
Yes, Best Buy stock fell in 2018 amid competition and falling stock prices. However, I see this as a temporary setback. BBY stock has seen a natural pullback as it had steadily moved higher over the past few years.
With profit-growth on track and a valuation flirting with the single-digit levels, BBY should continue to rise. The upcoming report will probably not change that expectation.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
