Why some rate Best Buy as a 'buy'

With the economy in a tailspin and retail sales slumping across the country, this would seem like the perfect time to avoid the stock of electronics retailer Best Buy Co. (BBY).

But Best Buy long has been the kind of stock that short-term investors like to buy on the bounce.

The stock has had a history of steep climbs and breathtaking descents. In 2000, for instance, Best Buy hit a high of nearly $40 a share (split-adjusted) then plunged to about $12 a share. In early 2002, it was back up to nearly $35 a share, but sank to about $18 a share by the end of the year. It hit its all-time high of more than $55 a share in 2006, but zigzagged back down to under $40 a share earlier this year. The stock recently was trading at about $45 -- down more than 15 percent from its 52-week high.

The company's recent earnings report indicates that business has been tough the past few months. In-store sales declined about 0.2 percent the past quarter. But earnings per share were up 10 percent in the quarter (ended March 1) and up 12 percent for the past fiscal year.

Michael Kaiser, a research analyst with Piper Jaffray, rates Best Buy a "buy," with a price target of $54 a share.

As the economy continues to slog through an economic slowdown, Best Buy has no intentions of hunkering down and riding out the storm. The nation's largest consumer electronics retailer is continuing to keep its growth engine purring by aggressively expanding overseas and adding new revenue centers within its existing stores.

"In 40 years as a company, our growth has certainly not been linear," said James Muehlbauer, Best Buy CFO. "We try not to focus on the performance of one particular quarter. We want to focus on the long term and try to do whatever we can to provide the best experience for our customers and our shareholders."

Part of that strategy is expansion beyond its U.S. store base. The company already has opened several stores in Canada and one in China and plans to open several stores in Mexico next year and several stores in Turkey in 2010.

But its biggest growth push in the next few years will be in Europe, where it has entered a joint venture with United Kingdom-based CarPhone Warehouse, which operates about 2,400 stores in 14 European countries.

CarPhone Warehouse recently divested its retail business to the joint venture. Best Buy paid $2.1 billion for a 50 percent stake in the company. "However," Kaiser said, "the two companies' existing Best Buy Mobile joint venture is included in the assets of the new company, which effectively raises Best Buy's stake from 50 to 75 percent."

Under the joint venture, Best Buy plans to expand the selection of electronics products inside CarPhone Warehouse stores. Until now, product sales in the stores had been limited almost exclusively to mobile phones and related equipment. Best Buy also plans to begin opening new electronics superstores in Europe similar to its U.S. stores in the years ahead. The first store is expected to open next year.

In the United States, the company is trying to beef up its in-store sales with several new offerings. The company now sells Dell computers in many of its stores and has added in-store Apple sales centers in nearly 400 of its 950 stores. It plans eventually to have Apple sales centers in all its existing stores.

The firm also is pushing in-store mobile phone sales centers to try to capture a significant share of the cellular phone market. "In most of our product categories, Best Buy has about a 20 percent market share, but in mobile phones we only have a 2 percent share," Muehlbauer said.

By increasing market share of cell phone sales, Best Buy expects to drive up earnings and revenue in coming years. "We know that, long-term, the wireless space will be very popular with our customers." But even now, in the midst of a retail slump, Muehlbauer expects strong growth in cell phone sales. "Even in a slow economy, consumers are still buying mobile phones. When the economy does get stronger, we'll be in a much better competitive position in the mobile phone space."

Best Buy is partnering with CarPhone Warehouse to set up Best Buy Mobile sales centers in all of its U.S. stores. About 200 Best Buy stores have in-store mobile phone sales centers, and the company plans to have the centers in all its stores by March 1.

Even with the addition of its Apple and mobile phone in-store sales centers and its aggressive expansion around the world, Best Buy still may struggle to keep earnings growth strong during this economic slowdown. But once the economy starts to rebound, stock market investors probably can expect another Best Buy bounce.