Shares of Best Buy (NYSE:BBY) soared higher on this morning, after the big box electronics retailer reported fourth-quarter numbers. Best Buy beat top- and bottom-line expectations, boasted impressive comparable sales growth and delivered an above-consensus fiscal 2020 guide. BBY stock jumped 16% higher in response.
Although I’m not a huge fan of chasing rallies, I think this rally in BBY stock has room to run higher. In the big picture, BBY stock was really beaten up in late 2018 on concerns of a consumer slowdown and headwinds across the consumer electronics industry. Neither of those things happened. The consumer remained strong, and the consumer electronics industry remained red hot.
The reality is that, so long as the U.S. economy remains healthy, then the consumer will remain strong, the consumer electronics space will remain hot, and Best Buy will continue post impressive numbers. Right now, the outlook is for the U.S. economy to stabilize and remain healthy in 2019. As such, Best Buy should continue to report healthy numbers throughout the rest of the year. If so, fundamentals imply that BBY stock has room to run to prices well above $70.
As of this writing, BBY stock is trading hands at prices just below $70. As such, upside into the end of the year looks good here. Investors may want to wait for the stock to cool off, as it is in technically overbought territory. But, any post-rally cool off should be seen as opportunity to buy into what has once again become a stable growth story.
Q4 Numbers Prove Long-Term Stability
Best Buy’s Q4 numbers were much better than expected. Enterprise and domestic comparable sales growth both came in ahead of expectations at 3%. That 3% mark are in addition to 9% growth in the year ago quarter, so comps are up 12% on a two-year stack basis. Meanwhile, domestic digital sales rose nearly 10%, on top of 18% growth in the year ago quarter. Operating margins also improved 30 basis points year-over-year.
Overall, Best Buy’s Q4 numbers were more of the same: healthy positive comparable sales growth and margin stabilization. More of the same isn’t what BBY stock was priced for. Instead, because of concerns related to a consumer slowdown, BBY stock was priced for growth to slow dramatically and for margins to fall out. That isn’t happening. Instead, Best Buy is still reporting positive comps with stable margins.
This growth profile is the norm today and will be the norm for the foreseeable future. Why? Because so long as the consumer remains healthy, they will continue to spend big on the consumer electronics front. Just think about the volume of innovation occurring in that space. Everything is becoming “smart”, and every consumer is gravitating towards these new smart devices. Smartwatches, smart speakers, smart home systems, smart headphones, smart appliances, so on and so forth. The list gets longer and longer every year.
In other words, Best Buy is benefiting from a secular rise in the number of connected devices. As the world becomes more digitally connected than ever before, the volume of connected devices will only rise over time. All of those devices will be sold at Best Buy. They will all have high demand because of their novelty and ability to increase consumer convenience. As such, so long as the consumer remains healthy, Best Buy projects to put up strong numbers.
At the current moment, the U.S. economy projects to remain healthy for the foreseeable future. As such, Best Buy projects to continue to grow at a healthy rate for the foreseeable future, too. That implies steady gains for BBY stock through the rest of the year.
Valuation Implies Room For Further Upside
Management called for Best Buy to grow comparable sales by roughly 1.5% in fiscal 2020, for operating margins to stabilize around 4.6%, and for EPS to rise by 4%, driven by low single-digit sales growth and buybacks.
This is the sort of growth profile that should remain steady and stable over the next several years. Low single-digit revenue growth in the 0-2% range will be the norm. So will margin stabilization in the 4.6% range. And, buybacks plus 0-2% operating profit growth will drive steady mid single digit EPS growth.
Under those assumptions, I think Best Buy can do about $7.50 in EPS by fiscal 2025. Based on a historically average 14x forward multiple, that implies a reasonable fiscal 2024 price target for BBY stock of $105. Discounted back by 8% per year (2 points lower than my normal 10% discount rate to account for the yield), that equates to a fiscal 2020 price target of over $77.
BBY stock currently trades right under $70. Thus, this stock has 10%-plus upside into the end of the year, plus a 2%-plus yield.
Bottom Line on BBY Stock
The best time to buy BBY stock was in late 2018. But, buyers here haven’t missed the whole rally. Secular trends imply that slow and steady is the new norm for Best Buy. That new norm supports prices for BBY stock near $80 by the end of the year. As such, upside from prices around $70 looks good.
As of this writing, Luke Lango was long BBY.
