This Board Member Thinks Best Buy is Just That

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Down 24% this year (and 55% over two years), times are not good at Best Buy (NYSE: BBY). One of the most successful companies in recent history, Amazon.com (NASDAQ: AMZN) is aggressively moving into the electronics retail space; it doesn’t have to deal with the costs of a big-box retail store, and soon will be able to offer same-day delivery in many U.S. cities (Read our articles about Amazon). Founder and former chairman Richard Schulze, who still has a large stake in the Best Buy after being forced out earlier this year, recently announced plans to lead a buyout of the company (see our previous discussion of Best Buy). Speculation on that front continues, even though a large amount of private capital would need to be corralled in order to execute a transaction, and the general market sentiment is that Best Buy has a very challenging future ahead of it. It could be difficult to find not only equity but also sufficient debt capital to consummate the buyout.

Matthew Paull, a Board member at Best Buy, is a bit more optimistic about the company’s prospects. On October 2nd, he directly purchased 6,500 shares at an average price of $16.89. As of this writing, the stock is up 7% from that level, as news regarding Schulze’s buyout reminded the market that it was still a possibility. Paull now owns just under 25,000 shares, so the purchase is a significant percentage increase in his exposure to the company’s stock price (Learn more about academic studies on insider purchases).

Best Buy disappointed the Street in its most recent quarterly report, with revenue down 3% and earnings collapsing compared to the same period in 2011. In the forward fiscal year, which ends in January 2014, analyst consensus is for $2.99 in earnings per share; this implies a P/E multiple of 6. This figure is low, but the sell-side expects a decline in earnings going forward and clearly investors are even more skeptical. Even a high dividend yield, about 4%, is failing to convince the market that Best Buy is a good value. In the event of a successful buyout, the price would obviously rise from current levels. If Schulze fails, then investors are still looking at a cheap company paying good dividends, and the only question is how much earnings will continue to decline.

Amazon, meanwhile, trades at very high earnings multiples: 315 times trailing earnings and 111 times forward estimates for 2013 (No, we didn’t forget any decimal points). No matter how enamored we are with the company on a strategic basis, and even with revenue rising about 30% last quarter compared to a year ago, we can’t recommend the stock at that valuation. We would also compare Best Buy to RadioShack (NYSE: RSH), Wal-Mart Stores (NYSE: WMT), and Target (NYSE: TGT). Radio Shack is being hammered by the same industry factors as Best Buy, and is not expected to be profitable this year or next year. Its stock price has fallen 84% over the last year and it now has a market cap of only about $200 million. The decline seems to have been stemmed, at least in terms of revenue, which was about flat from the second quarter of 2011, but we would need to see more earnings there as well. Wal-Mart and Target are seeing slow growth, as the large big-box stores seem to be able to head off Amazon, at least for now. At 16 and 15 times trailing earnings, respectively, and with respectable dividend yields of 2.2 to 2.3%, they look safer than Best Buy and still have value potential.

Investors have an upside if the buyout of Best Buy proceeds. There is potential upside even if the company remains publicly traded and can stabilize its business, but we think that Target or Wal-Mart offer moderately lower value at much lower risk.

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This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Amazon.com, Best Buy, and RadioShack and is short RadioShack. 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.

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