Best Buy Is One Of The Best Value Stocks Right Now

Best Buy Moves Up On Growth Outlook 

Best Buy NYSE: BBY just reported one of the most lackluster quarters we’ve seen this reporting period and yet shares are moving higher. Why? Because the company is actively investing in its future and a new growth trajectory is emerging. While it is very early in the game, it looks like Best Buy may finally break out of its malaise and there’s more. The company just increased its dividend by 26% and initiated a $5 billion share repurchase plan that makes the 10X valuation very appealing. The dividend is now worth about 3.5% to investors, the buyback another 21% of the market cap, and the balance sheet looks more than sound enough to sustain both. 

Best Buy Has Mixed Quarter, Gives Weak Guidance 

The price action in Best Buy is a testament to the company’s health and potential rising more than 7.5% in the wake of the earnings report despite how mixed the results are. The company reported $16.37 billion in net revenue for a decline of 3.4% versus last year but last year was a record quarter. The really bad news is that revenue missed the Marketbeat.com consensus by 270 basis points due to the rise of Omicron and supply chain headwinds. Comps fell -2.3% and were compounded by permanent store closures at non-performing locations. eCommerce, foundational to the growth story, declined 11%. 

Moving down to the margin, the gross margin contracted by 70 basis points but much less than expected. This left the adjusted earning at $2.73 or $0.02 ahead of consensus but margin pressure and supply chain headwinds are expected to continue in 2023, at least in the front half of the year. The guidance for both revenue and earnings came in on the light side of the consensus with earnings lagging more than revenue. In our view, the guidance is cautious given the expectation for back-half economic improvement in 2022 and the company’s investments in growth. 

The Analysts Like Best Buy, Targets Fall 

The consensus of 14 analysts covering Best Buy is a firm Buy but the sentiment has been cooling. There have been no commentaries since the earnings release and guidance but the latest round, issued just a week before the release, includes 6 notes and 6 price target reductions. The consensus of these 6 is near $110 or roughly in line with post-release price action. The broader Marketbeat.com consensus is closer to $119, however, but there is a caveat. The consensus is trending lower in the 90 and 30-day periods and may trend even lower given the weak outlook for business this year.

The Technical Outlook: Best Buy Gains Capped, Ranging May Begin

Best Buy certainly offers an attractive value-to-yield ratio but that may not be enough to keep shares moving higher, at least for now. Price action surged in the wake of the report but hit resistance at $110 near the midpoint of the post-COVID trading range. If price action can not get above this level it will likely move sideways within the lower half of the range until a clearer path to revenue and earnings growth is at hand. If, however, price action does get above $110 we see it moving up to the top of the range near $130. If the analysts get on board this deep-value, high-yielding stock like we think they will the market will likely move up to a new all-time high.