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Best Buy: Best Time to Buy

Shares of Best Buy have stalled. But its primary competition is weak, sales are strong, and its flashy electronics stores are stuffed with exciting new gear. Time to go shopping?

One reason Home Depot showed its former boss Robert Nardelli the door -- if you can call $210 million to get lost a firing -- is its lackluster stock price. But since the middle of 2005, shares of Best Buy (symbol BBY) have fairly tracked HD's languishing stock. Yet there's no outcry over the chief executive of Best Buy, 33-year company man Brad Anderson. He is well-respected and paid modestly for the leader of such an empire. However, there's no doubt that Best Buy has disappointed its investors. An earnings miss in the quarter that ended in late November, the third quarter in the current fiscal year, hit the stock hard. Best Buy, which closed January 10 at $49.41, up 0.75% for the day, is down about 20% from 2006's peak and trades roughly where it did in the summer of 2005.

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But there are signs that the worst is over. Best Buy closed the holiday season with strong sales figures and got good reviews for its growth strategies at a meeting in early January with analysts held at the annual Consumer Electronics Show. These include more emphasis on sales to businesses via a specific department and sales force, an expansion of the computer-fixer Geek Squad, and, though it's in the early stages, a measured move into China. Best Buy is not losing its edge at home. Its chief rival Circuit City is in weak condition, while Home Depot has to fight a booming Lowe's and Wal-Mart is dogged by Target.

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So what's holding back Best Buy's stock? Crowded stores and an avalanche of online orders don't assure fat profits. The company's explanation for the latest stock swoon is that a decision to cut prices on laptop computers and large-screen flat-panel televisions led to a decline in gross profit margins during the past quarter. CEO Anderson defends this strategy by saying the price cuts are a "small investment" to keep customers in the fold. He adds that shoppers will be back, often with gift cards they received over the holidays, to buy more-profitable stuff in the upcoming months. The cost of many of those purchases will exceed the value of the gift cards. Owners of big-screen TVs often want to add home-theater gear, which Best Buy sells in attractive Magnolia stores-within-its-stores. So Anderson says he thinks that the fiscal year will end on a strong earnings note in February and that next year's results will be solid, too.

You can take comfort with the other financial elements here. Inventories are low, there's little debt, the company is expert at managing its real estate, and there aren't any scandals. If you buy at $50, you're paying 16 times the $3.17 per share that analysts on average expect Best Buy to earn in the fiscal year that ends in February 2008. For a company capable of generating earnings growth of 15% a year, that's a deal.

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