Best Buy raises its growth outlook
best buy (NYSE:BBY) just reported one of the lackluster quarters we’ve seen this reporting period and yet stocks are rising. Why? Because the company is actively investing in its future and a new growth trajectory is emerging. Although it’s very early in the game, it looks like Best Buy can finally come out of its malaise and there’s more. The company just increased its dividend by 26% and launched a $5 billion share buyback plan that makes the 10X valuation very attractive. The dividend is now worth around 3.5% to investors, the buyback another 21% of market capitalization and the balance sheet looks more than strong enough to support both.
Best Buy has mixed quarter, gives weak guidance
Best Buy’s price action speaks to the health of the business and its potential to increase more than 7.5% following the earnings report, despite the mixed results. The company reported net revenue of $16.37 billion, down 3.4% from a year ago, but last year was a record quarter. The really bad news is that revenue missed Marketbeat.com’s consensus by 270 basis points due to the rise of Omicron and supply chain headwinds. Earnings fell -2.3% and were compounded by permanent store closures in underperforming locations. E-commerce, which is the foundation of the growth story, was down 11%.
Moving down to the margin, the gross margin contracted by 70 basis points but much less than expected. That left adjusted earnings at $2.73 or $0.02 ahead of consensus, but margin pressure and supply chain headwinds are likely to continue into 2023, at least in the first semester. Forecasts for revenue and earnings came on the bright side of the consensus, with earnings lagging more than revenue. In our view, the guidance is conservative given expectations for economic improvement in the second half of 2022 and the company’s investments in growth.
Analysts like Best Buy, targets fall
The consensus from 14 analysts covering Best Buy is a firm buy, but sentiment has cooled. There have been no comments since the earnings and forecast were released, but the latest round, released just a week before the release, includes 6 ratings and 6 price target cuts. The consensus for these 6 is near $110 or roughly in line with the price action after the release. Marketbeat.com’s broader consensus, however, is closer to $119, but there is a caveat. The consensus tends to fall in the 90 and 30 day periods and could fall further given the weak outlook for activity this year.
The Technical Outlook: Best Buy’s Earnings Capped, Variation May Begin
Best Buy certainly offers an attractive value-to-return ratio, but that may not be enough to keep the stock up, at least for now. Price action surged following the report, but hit resistance at $110 near the midpoint of the post-COVID trading range. If price action cannot rise above this level, it will likely move sideways into the lower half of the range until a clearer path to revenue and earnings growth is at hand. If, however, the price action breaks above $110, we see it rising towards the top of the range near $130. If analysts accept this high-value, high-yield stock as we believe, the market will likely hit a new all-time high.