Novice Investing - Best Buy Is Not The Best

Date: Monday 01st 2008f December 2008 05:30:19 PM

Best Buy Is Not The Best - 06/19/2007

By: Hari Wibowo

The largest electronics store in the nation, Best Buy Co. Inc. (BBY), reported weaker profit as sales of lower margin products increased during the quarter. Net income came in at $ 192 Million or 39 cents per share versus 50 cents expectation. Clearly, this is a huge miss. Revenue figure, however, is above expectation. It came in at $ 7.93 Billion. Meanwhile, same store sales grew 3% during the quarter. Same store sales is used to gauge the health of a retailer.

While the first quarter normally is a seasonally slow period, Best Buy cautioned that consumer spending will be unpredictable this year. It again relies on the sale of flat-panel televisions and portable computers.

Best Buy is a relatively strong player in the consumer electronic sectors. Last fiscal year, it amassed revenue of $ 30.9 Billion versus $ 12.4 Billion revenue for smaller rival Circuit City Stores Inc. (CC). Balance sheet is also stellar with $ 3.2 Billion in positive net cash versus $ 700 Million for Circuit City. However, on the per share basis, Circuit City looks more attractive as Best Buy is 10 times more valuable than Circuit City in terms of market capitalization ($ 23.01 Billion versus $ 2.82 Billion)

For the year, Best Buy now expects earning to be $ 2.95 per share from $ 3.15 previously. At recent price, Best Buy is trading at 15 times earnings which is a standard P/E ratio for big cap dominant players. With the expectation of lower profit growth, it is hard to justify investing in Best Buy. In the coming months, Best Buy may drift lower and presents us with good investing opportunity. Until then, you need to keep Best Buy on your watch list.

Circuit City Stores (CC) may present us with a nicer opportunity for investment. With positive net cash of roughly 25% of market capitalization and shares that has fallen 45% from its 52 week low, we can bet on Circuit City and electronic retailer as a sector. For now, Circuit City is expected to report profit of $ 0.51 per share, which is hardly impressive considering current price of $ 16.53 per share. But once you take into account of the successful turnaround of the company, share price can rebound much more. Meanwhile, the positive net cash will provide cushion for the company to right itself.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Best Buy Co. Inc. (BBY) or any other securities.

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