A Look at Best Buy...Buffett Style
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I am going refer to The Motley Fool article Buffett’s Top 10 Investing Secrets to take a look at the value in Best Buy (NYSE: BBY) and to give a little more “value” to those who read my last blog on the company. For this particular story I want to refer to the investing secrets that relate to stock picks, rather than investing style. I will list several points as they appeared in the article.
2. The concept of a “moat”
Best Buy has a top ten brand rating in the US with an enterprise value of $7.1 billion and over $51 billion in revenue. Best Buy is going head-to-head with Amazon (NASDAQ: AMZN) by planning to double their online business over the next 3 to 5 years. The planned smaller showroom space (due to retail subletting) will allow Best Buy to focus on a few key profit centers, notably connected devices (PCs, tablets, and mobile phones) and their associated service plans. The addition of mobile-only stores has been working in several markets and there are plans for another 100 opening during fiscal 2013.
3. “Leverage is the only way a smart guy can go broke.”
With a current ratio (Current Assets/Current Liabilities) of 1.16 for its most recent quarter, Best Buy’s financial position is a little weak and needs to strengthen this position. Quarterly earnings growth (year-over-year) is down 25.5%, and its most recent quarter a $1.2 billion loss, so clearly Best Buy is working some things out.
4. “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”
Right now the market is telling us that Best Buy may be having some difficulty, however pay attention to the moves the company is making. I referred to the layoffs Best Buy announced in my last blog, where I had recommended that the company continue investing in education and expansion of the Geek Squad Unit. Today they announced more specifically that the 600 layoffs in the Geek Squad were from their repair and home electronics installation positions and will be replaced with 500 new hires geared more toward higher-end service and contract business. A good move and something to pay attention to while the stock has been beaten down.
8. The concept of inner scorecard vs. outer scorecard
Are you going to judge your stock picks on what others tell you about your picks, or what know to be true? This concept refers to the ability to be a true contrarian. Can you shut out the noise and make your own decisions no matter what you are hearing from the foolish (small f) investment community? Some have commented here that many bloggers have been cranking out the negative reports on Best Buy. I have seen my share of negative mainstream press across the financial websites as well. Maybe the majority thinking is signaling a contrarian buying opportunity.
9. Margin of safety
With a 5-year expected PEG Ratio of .92, some would argue this stock is undervalued and it's a good time to pick up some for the long-term. Others would argue that today’s price could open the door to a possible buyout. This usually is a bullish signal for investors, but I would like to see some positive news from the company before moving in on the stock.
10. “A ham sandwich could run Coca-Cola.”
I am not comparing Best Buy with, nor do I believe it is as well run as Coca-Cola. However, I do think we already had our ham sandwich with the stepping down of former CEO Brian Dunn because of a "personal conduct" probe regarding some misappropriated funds and a female subordinate. Mr. Dunn had been running the company for over 28 years (very successfully until this last year), and a change might be exactly what this company needs. Clearly his mind was somewhere else and now the responsibility of righting this ship sits squarely on the shoulders of interim CEO George Lawrence Mikan.
Looking at these Buffett-style value points, there may be some opportunity here with Best Buy. With a stock trading near its 52-week low, you might consider nibbling on shares ahead of a possible buyout, although that is risky right now and has been mostly a rumor. I would wait to see the results of the second quarter. As I have mentioned before, I think there is still some downside risk in the next quarter or two because of uncertainty in today’s economy. Watch for a turnaround possible by the middle of the fourth quarter (January 2013) but until then, there is still too much uncertainty.
I will be watching this stock over the next couple quarters to pick up cues from management, paying careful attention to the effects of re-merchandising and cost saving moves as well as any clues to a possible sale of the company. I am taking a wait-and-see approach with this stock.
Dubbles has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Best Buy. Motley Fool newsletter services recommend Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.