Best Buy Bulls See Value after 257% Stock Surge

NEW YORK (TheStreet) - Best Buy (BBY) may continue to see strong stock gains even after a 257% share price rise in 2013, according to a set of analyst upgrades of the restructuring big box electronics retailer.

In two Monday upgrades both Jefferies and UBS (UBS) said Best Buy shares could continue to rise as the company realigns its store space toward store-in-store partnerships with Microsoft (MSFT), Google (GOOG) and Samsung, and begins to introduce kiosks for Google and Amazon (AMZN) products. The company is also in the process of reducing store space devoted for music and DVD sales and distributing it to higher margin categories such as home appliances.

UBS upgraded Best Buy to a "buy" rating with a $49 a share price target. Jefferies, which already had a "buy" rating for Best Buy, increased its price target for the company to $52 from $40 a share a share.

Best Buy shares were gaining over 2% in Monday pre-market trading. The company's stock has risen over 257% in 2013, as of Friday's close, as CEO Hubert Joly has been able to execute ahead of schedule on cost-cutting initiatives and sign store-space partnerships with large tech hardware manufacturers.

Best Buy calls its cost-cutting initiative and re-deployment of store space a "Renew Blue" program.

"Best Buy's shares have been on some ride over the past year, but we think the journey is not over," Michael Lasser, a UBS analyst wrote, in a Monday upgrade.

"A lot has been written and discussed about all of the actions taken by the company's new management team (such as paring expenses, resetting the stores, increasing connectivity with vendors, and investing in its online business) and the external developments that have occurred in its favor (like the online sales tax playing field becoming more level, the power among vendors like AAPL becoming more balanced, and the interest in some product categories like gaming starting to rise)," Lasser added.

The analyst believes Best Buy will continue to outperform cost-cutting targets, eventually realizing $1 billion in Renew Blue cost savings. Those savings taken with a higher margin store space mean Best Buy's shares can gain as investors increase their expectations of the company's 2014 earnings per share, instead of a continued rise in the company's earnings multiple.

Much of Best Buy's 2013 share price gain can be attributed to an over tripling in Best Buy's next-12-month price-to-earnings ratio through its 2013 stock surge.

Jefferies analyst Daniel Binder, meanwhile, said in a Monday client note that Best Buy's store space re-allocation could drive an up-to-13% increase in the company's revenue, or $500 million in incremental earnings before interest and taxes in 2014.

"Best Buy has been re-allocating floor space by reducing square footage in shrinking, low margin categories (i.e. entertainment and media) and expanding better margin growth categories (appliances, mobile and computing). This improves the store experience for the customer and makes good financial sense for the company and shareholder," Binder wrote.

The analyst expects that Best Buy's third-quarter earnings, slated for Nov, 19. 2013, will continue to reflect the company's restructuring efforts and earnings improvements. Binder also suggests Best Buy is re-gaining market share from Wal-Mart (WMT), Costco (COST) and h.h.gregg (HGG).

Best Buy returned to profitability in the second quarter and its operations are beginning to generate cash again. The company has also beat consensus expectations the last three quarters.

In September, TheStreet noted that Microsoft's acquisition of Nokia's (NOK) handset business indicated that the world's largest tech hardware manufacturers would continue to invest heavily in new product offerings. Those products indirectly benefit Best Buy sales. Store-in-store partnerships with the likes of Microsoft, Samsung and Google -- who all have small retail presences -- provide a more direct benefit for Best Buy.

"Best Buy is uniquely positioned to benefit from what could be a growing rivalry between Microsoft and Google, as those firms seek to cut into the mobile industry profits that Apple has achieved by integrating its operating system with its mobile hardware," TheStreet reported.

In the past year, Google and Microsoft have both opened their own space within Best Buy stores nationally. While Best Buy's store-in-store concept with Google and Microsoft is just starting to be reflected in quarterly earnings reports, Microsoft's further commitment to hardware indicates Best Buy's strategy could take hold.

The firm's same-store sales declines appear to be ending. During the second quarter, Best Buy saw comparable-store sales fall just 0.4%, a significant improvement from the 3% plus declines the company reported a year ago. Overall revenues at Best Buy were flat in the second quarter at $9.3 billion, driven by a 10%-plus increase in online sales.

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