Bull of the Day: Best Buy (BBY)

Best Buy (BBY) is a Zacks Rank #1 (Strong Buy) that is a popular electronics retailer. The company specializes in consumer electronics, home office products, entertainment software, communication, food preparation, wellness, heath, security, appliances and related services.

After a big move in 2020, the stock has been trading sideways all year. However, a recent earnings beat and some positive news should bring bullish investors back for another run.

About the Company

Best Buy operates through two business segments, with the biggest being Domestic Operations (93% of Q222 total revenues). This segment comprises all store, call center and online operations, operating under the brand names Best Buy, bestbuy.com, Best Buy Direct, Best Buy Express, Best Buy Mobile, Geek Squad, Magnolia Audio Video and Pacific Sales.

The International Operations (7% of Q222 total revenues) segment consist of all store, call center and online operations in Canada under the brand names Best Buy, Best Buy Mobile, bestbuy.ca and Geek Squad.

The company has over 61,000 full time employees and is headquartered in Richfield, Minnesota. Best Buy used to be known as Sound of Music, which was founded in 1966. As of January 30, 2021, it had 1,126 large-format and 33 small-format stores.

Best Buy has a market cap of $27 Billion and has Zacks Style Scores of “A” in Growth and Value. The stock has a Forward PE of 11 and a 2.5% dividend, making it a favorite for value investors.

Q2 Earnings

In late August the company reported a Q2 earnings beat of 56%. This was the fifteenth straight EPS beat, a winning streak since their last miss in 2017.

Revenue also came in above expectations and Best Buy guided Q3 revenues to $11.4-11.6 billion v the $10.5 billion expected. The company affirmed their share buyback of at least $2.5 billion and saw SSS up 20% year over year.

Online sales were down 21% year over year, but this number was skewed due to COVID last year.

Management commented that they expect comparable sales to be flat to down versus last year, or a high single digit decline.

Supply Chain Issues

Like many companies, Best Buy is seeing supply chain issues and shortages. Management commented that they see less of a promotional environment because of this, but product availability did improve in Q2. Some price increases have been pushed to consumers and the company expects more promotions in the back half of the year as we head into the holidays.

Estimates

Despite the challenges, estimates are ticking higher across most time frames.

Over the last month, estimates for the current quarter have been raised by 30%, from $1.41 to $1.83. For the current year, we have seen jump of 15% in that same time frame.

In addition to estimates, some analysts have taken their price targets higher since earnings. DA Davidson reiterated their Buy, but lifted their target from $125 to $135. JPMorgan (NYSE:) also lifted their target to $122 from $118.

Other News

Since earnings, Best Buy has had some exciting news. While the headlines have not influenced the stock much, the news show the initiative the company is taking to grow.

In October the company will be launching an E-transportation category online and some stores. A new lineup of electric transportation, which is already available online, will allow consumers to shop e-bikes, scooters, mopeds and accessories.

Best Buy also announced a partnership with Amazon (NASDAQ:) in which it will carry a new lineup of Fire TV devices and the first ever Amazon built TVs. Picture a TV version of your Alexa.

The Technicals

Best Buy is trading over 100% higher from the COVID lows. So it is no wonder that 2021 has been a tough year of sideways trading action. While the stock is up 10% for the year, its well off the highs of $128.57 made back in April.

Investors are now looking at support levels as the bulls continue to be patient.

The stock recently broke its 50-day and 200-day moving averages, which both sit around the $113 area. A move back above these levels would be a good sign, but the $108 level is very important. Buyers continue to come in at that level, which is the 61.8% retracement from the March lows to April highs.

If the stock can get some momentum back, look for a run to $135.

Bottom Line

Earnings looked great, but there might be some hurdles this quarter with supply chain. The stock continues to consolidate while the company gets through this environment. However, the back half of the year looks solid, with estimates shooting higher.

For a value investor, this stock offers a great opportunity with a nice dividend. For a trader, long against that $108 support level offers a good risk/reward.

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