Consumer electronics retail giant Best Buy (NYSE:BBY) is set to report third quarter numbers before the bell on Tuesday, Nov. 26. I like BBY stock heading into that print because I think the numbers will be decent, and am expecting management to sound a bullish tone with regards to the holiday shopping season.
More importantly, though, I like Best Buy stock for the long haul, as I feel this is a materially undervalued stock with compelling potential for steady profit growth and expansion to drive meaningful share price out-performance over the next few years.
Zooming out, the investment implication with Best Buy stock is simple: Stick with Best Buy stock into the third-quarter print. If the numbers are good and the guide is strong, stick with the post-earnings pop in BBY stock. If the numbers are bad and the guide doesn’t inspire confidence, buy the post-earnings dip in BBY stock. Either way, own this stock heading into the 2019 holiday season, and hold it for the long run.
Best Buy Earnings Should Be Good
My research suggests that Best Buy’s earnings should be pretty good, characterized by decent third-quarter numbers and a strong holiday quarter guide.
Foot traffic data from Placer.ai, the world’s leading foot traffic analytics platform, shows that Best Buy’s in-store traffic trends are improving for the first time in months amid aggressive store closures. That’s a positive read on the company’s real estate optimization plans. At the same time, though, web traffic data on Bestbuy.com from SimilarWeb isn’t that strong, while search interest data from Google Trends is neutral. It’s also worth noting that Best Buy’s comparable sales growth trends have meaningfully decelerated in 2019, relative to 2018.
In other words, while it looks like Best Buy is due to report another positive quarter, it won’t be a blowout quarter by any means.
Fortunately, Best Buy doesn’t need to report blowout third quarter numbers. The third quarter is significantly less meaningful that the holiday-packed fourth quarter. So what really matters tomorrow morning is what management says about early holiday shopping trends.
I think they will strike a very confident tone. Just look at the backdrop. At the moment, the U.S. has a low unemployment rate, strong wage gains, historically high consumer confidence, and low interest rates. The trade war is taking a backseat and there are tons of new consumer tech hardware. New iPhone models are selling well while video game sales are bouncing back amid a plethora of big content launches.
A lot is going right for Best Buy ahead of the most important time of the year for the company. As such, regardless of how third quarter numbers look, I think BBY stock is a stock you want to own into the holiday season.
Best Buy Stock Has Healthy Long-Term Potential
In the big picture, Best Buy stock is a name worth owning for the long haul. Through various initiatives like in-store expert help, real estate optimizations, e-commerce and omni-channel capability expansion, and much more, Best Buy has successfully crafted an enduring niche for itself as the de facto retailer for consumer electronics. That is, if you want to buy a consumer electronics product, chances are fairly high that Best Buy will be one of (if not the only) store or website you visit.
The consumer electronics space is a secular growth one. Everything today is turning into a consumer electronics device. Ten years ago, we just had phones, fridges, and watches. Now, we have smartphones, smart fridges, and smartwatches. That’s just the tip of the iceberg. Over the next decade, we will get more widespread proliferation of smart clothes, smart glasses, smart cameras, so on and so forth. The more those products go mainstream, the more consumers will go into Best Buy stores.
In other words, this is a steady growth company supported by healthy tailwinds in the consumer electronic space.
Assuming mild revenue growth over the next few years with some upside margin drivers, Best Buy could easily net about $8.50 in EPS by FY25. Further assuming a historically average 13.5-times forward earnings multiple, then a reasonable FY24 price target for Best Buy stock is about $115. Discounted back by 7% per year (3 points below 10% to account for the yield), that equates to a FY20 price target of over $85.
Best Buy stock trades just above $70 today.
Bottom Line on BBY Stock
Best Buy’s third quarter numbers may not be great, but the holiday guide should be promising, and shares look materially undervalued heading into the print.
Ultimately, it’s tough to say whether or not this combination will boost BBY stock after earnings. But, regardless of where BBY stock goes after the print, this is a name worth owning both into the holiday season and over the long haul.
As of this writing, Luke Lango was long BBY.
