Why There Are Better Buys Than Best Buy

Shares of Best Buy (BBY) are up 31% year to date and 15.6% just this quarter. Investors seem to have already anticipated a strong holiday season. But the questions is whether Best Buy can match its huge performance. The electronics retailer reports third-quarter results on Thursday.

At the end of August, Best Buy posted better-than-expected results, which lit a fire under the shares. Its second-quarter earnings were 57 cents per share, 14 cents better than the consensus of 43 cents. Revenue rose a microscopic 0.1% to $8.53 billion, vs. the $8.39 billion estimate.

The better-than-expected earnings came almost entirely from a lower tax rate, which fell from 37% to 34.6%.

Same-stores sales were up 0.8% vs. flat guidance. Last year, same-store sales were up 3.8%.

Gross margins fell 28 basis points to 24.17%, while operating income was flat at 3.43%.

U.S. online revenue surged 23.7% to $835 million due to higher traffic, higher average order amounts and better customer conversion. As a percentage of domestic revenue, e-commerce is now 10.6%, up 200 basis points.

The company closed 12 large-format and 22 Best Buy Mobile stores during the quarter. On a constant currency basis, international revenue rose 4.1%.

Strength was seen in wearables (like the Apple (AAPL) Watch), home theater, major appliances and computing. Only mobile phones and gaming declined. (Apple is an Action Alerts PLUS holding.)

Best Buy reports third-quarter results on Thursday. Analysts are expecting just 0.4% growth. But Best Buy could benefit from better demand for mobile phones and televisions as new models hit the sales floor this quarter.

Management said earnings this quarter should fall into a range between 43 cents and 47 cents per share, vs. estimates of 45 cents. Revenue is expected to be in the range of $8.8 billion to $8.9 billion. Same-store sales are expected to be up 1%.

With the stock up so much, investors are banking on a strong second half. The fourth quarter represents about 55% of total sales so, with the stock up 36% year to date, it seems investors have already anticipated a solid holiday season.

I would sell into any rally. At $39, the stock is already trading at 12 times fiscal 2018 estimates of $3.23 per share. The three-year average forward multiple for Best Buy is about 12.1, so the stock is already there. The company has no top-line growth.

Earnings are mostly coming from cost savings or lower tax rates. The company has already saved $1.2 billion of its $1.4 billion cost reduction plan, so going forward it will be a lot tougher to squeeze out savings to drive earnings per share.

In my opinion, there are better buys.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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