Best Buy stock gets a “buy” rating.
Best Buy CEO Hubert Joly
Wall Street continues to lavish love on Best Buy stock
- Article by: Thomas Lee
- Star Tribune
- July 2, 2013 - 10:54 AM
Best Buy Co. is one of the hottest stocks on Wall Street. Count Credit Suisse, a major global financial services company, as a believer.
On Monday, Credit Suisse’s retail analyst upgraded his rating on Best Buy stock to “buy,” setting an aggressive 52-week price target of $40 a share, which would be an increase of about 35 percent of its current value.
“This story is about significant and transformational earnings growth, which we believe will materialize,” Gary Balter wrote in a report for Credit Suisse.
The bullish assessment circulated among investors on Monday and boosted Best Buy shares nearly 9 percent to close at $29.74 — a remarkable turnaround from December when the Minnesota company’s stock was languishing around $12 a share.
Much of this optimism about Best Buy centers around CEO Hubert Joly and his leadership team. Under Joly, the consumer electronics giant has identified several opportunities to squeeze more revenue and profits out of existing operations, both by cutting costs and boosting sales.
Instead of closing stores as it did last summer, Best Buy has expanded its partnerships with Samsung and Microsoft to create special “store-within-a-store” concepts inside the big box. Best Buy is also using its stores to shop merchandise to online customers and offer returned clearance items to all shoppers.
“If there is one line to describe the change, it is that Best Buy is turning its store base from a cost liability to an offensive weapon,” Balter wrote.
Best Buy officials declined to comment on the upgrade and Balter’s price target.
Over the short term, however, Wall Street’s newfound enthusiasm for the consumer electronics retailer might complicate Best Buy’s fragile recovery if it can’t meet such heightened expectations, some analysts caution. The Richfield-based company has yet to post consecutive quarters of increases in sales at stores open for at least a year. And it remains to be seen whether Best Buy can get those sales without sacrificing its profits as the company still faces formidable competition in Wal-Mart and Amazon.
But for now, Best Buy is the toast of Wall Street. Since early December, Best Buy shares have more than doubled, creeping closer and closer to $30 a share. So far this year, Best Buy is the top-performing stock in the benchmark S&P 500 index.
By historical standards, Best Buy remains an undervalued stock. The company’s current price-earnings ratio amounts to 14 times earnings, on par with Wal-Mart and far below the average P/E ratio of 20 to 23 times earnings.
Nonetheless, from here on out, Best Buy’s stock might crash if the company hits a rough patch and fails to perform quarter to quarter, said David Strasser, an analyst with Janney Capital Management, who’s bullish on Best Buy.
“I don’t think the company is overvalued, it still trades at a pretty good discount to the market,” Strasser said. “I’m pretty confident that it will reach $40 in two years. But Best Buy’s road has the potential to be bumpier after it crosses $30 because there is more expected of them. No one really knows what’s going to happen quarter to quarter. The stock will react negatively to a tough quarter.”
Some market observers agree. Since May, the number of Best Buy shares “shorted” (in which investors bet that the stock will go down) jumped nearly 30 percent to 27 million shares, according to Bloomberg data.
One hedge fund manager who once owned Best Buy stock is now shorting the shares because he believes Wall Street is way too optimistic.
“The sell side is chasing their tails,” said the manager, who requested anonymity because he was not authorized to speak on the record. “Best Buy is a great story — until it’s not.”
Credit Suisse’s $40 target is by far the most aggressive out of two dozen analysts who evaluated Best Buy stock in 2013, $4 higher than the next highest 52-week price estimate. The last time Best Buy’s stock traded at $40 a share was in December of 2010.
But Credit Suisse’s optimism is justified, Balter said, because Joly and his team have transformed the company’s culture.
“It begins with management and culture … a management team with vision, one willing to break down the silos, to question what would seem like basic ways of bringing product to market and interacting with consumers and to look at the costs with a sunset provision,” Balter wrote. “We see all of these elements in Best Buy.”
Thomas Lee • 612-673-4113
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