Columnist Lee Schafer provides short takes on economic incentives and choices, business strategy and performance, market moves, what business leaders are saying and doing and other topics that pique his interest.

The Persistent Downside Case on Best Buy

Posted by: Lee Schafer Updated: November 22, 2013 - 4:48 PM

In a recent column I described the work of David Strasser of Janney Montgomery Scott, a senior analyst who was rewarded for hanging tough with a buy rating on the stock of Best Buy Co. even as doubts started appearing last year about the company’s very existence. 

So far this year the stock has moved from less than $12 per share to a peak of more than $44 earlier this month and closed the week at $39.37.  

There is today the same sort of independent thinking on Best Buy, but instead of holding fast to a positive rating, this view is all about sticking to a pessimistic outlook.  That bearish analyst is Michael Pachter of Wedbush Securities, Inc.  

Pachter doesn’t appear to be quite as high-profile as Strasser but he is far from a fringe figure, an experienced analyst working with a well-known firm based in Los Angeles. His recent update is polished and grounded on some of his own team’s legwork.

“Best Buy management has done a laudable job in streamlining the company’s cost structure,” he wrote after the company released results from its third quarter on the 19th. "With that said, net income and cash flow are expected to be lower this year compared to last, with [comparable store sales] declines and margin compression more than offsetting the benefits from the lower overall cost structure. We… believe that Best Buy’s profits and cash flow will continue to decline at a faster rate than it can cut costs.”

It’s important to note that he does not knock Best Buy’s management, but he doesn’t bother to sugarcoat his views, either. The company’s holiday season initiatives, he wrote, will “result in a costly failure by year-end.”

With the stock trading near $40 per share, Pachter has a 12-month price target of $9.  His formal investment rating is underperform, which means the analyst expects this stock to do worse than the broader market.

But with a 12-month target price of $9 per share on a stock trading near $40, it’s a rating that would be read by any portfolio manager as “sell it, and sell it now.” 

Somebody is going to be very wrong on this stock – which is why we have a market.

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