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Bull of the Day: Best Buy (BBY)

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As the market looks to recover from a tough October, investors will be looking forward to the upcoming holiday shopping period and eyeing strong retail companies that are about to enter their busiest season. One great retailer that sticks out right now is Best Buy (BBY - Free Report) .

Best Buy is a leading retailer of consumer electronics and high-tech home goods. It owns brick-and-mortar stores, online platforms, and the Geek Squad service unit. The company is in the middle of its growth plan, titled “Best Buy 2020: Building the New Blue.”

This program aims to explore new expansion and cost optimization opportunities. Best Buy is developing omni-channel capabilities, upgrading its supply chain, and reinforcing partnerships with specific vendors. Moreover, the company is continuing to invest in core areas like appliances, health, smart home, and tech support. It is also rejuvenating its mobile phone department.

Now, an improving earnings outlook has earned the stock a Zacks Rank #1 (Strong Buy), and recent pullbacks in the broader market have given investors the chance to scoop up shares at an even more reasonable valuation.

Latest Earnings & Outlook

Best Buy reported its Q2 earnings results on August 28. The retailer notched adjust profits of $0.91 per share, easily topping the Zacks Consensus Estimate of $0.83 and improving nearly 32% from the year-ago period. Revenue for the period was $9.4 billion, which also beat estimates and surged 5% on a year-over-year basis.

Enterprise comparable sales increased 6% in the quarter, adding to the 5% growth it tallied in that segment last year. Domestic comparable online sales surged 10%, and overall, domestic comps were up 6%.

Best Buy’s balance sheet looked healthy at the end of the quarter. The company had about $1.9 billion in cash and cash equivalents and just $801 million in long-term debt. Management pledged to buy back a total of $1.5 billion worth of shares in the current fiscal year.

The strong quarter inspired Best Buy to lift its guidance for the rest of the year. Management now expected Enterprise revenue to grow 3.5% to 4.5%, up from previous guidance of nearly flat to up 2%. Earnings are projected to total $4.95 per share to $5.10 per share, which compared favorably to the Zacks Consensus Estimate, which stood at $5.01 at the time.

The strong earnings beat and guidance led to positive earnings estimate revisions, inspiring the company’s Zacks Rank #1 (Strong Buy) position. But investors will find that there are at least a few more reasons to like BBY right now.

Valuation

In terms of the forward 12-month earnings multiple, Best Buy is trading at a slight premium to its peer group, but the stock is near the “cheapest” level it has been in a year:

13.4x earnings is certainly reasonable, and as we can see, Best Buy typically trades at a premium to its peers, so we might not be put off by this. One might speculate that this premium is a result of optimism about Best Buy’s recent performance or its detailed growth plan.

Market-wide volatility was well timed for those looking to add retail exposure for the holiday quarter, as we can now get BBY at a muted valuation right before its stores are about to get busy.

The National Retail Federation projects that holiday retail sales in November and December will reach $717.45 billion to $720.89 billion. That would represent year-over-year growth of 4.3% to 4.8%. Best Buy is always well positioned to seize a good slice of this pie. This year, its stores are even adding more toys in an effort to capture some of the old Toys “R” Us demand.

We should also note a few additional things. For one, the stock also has a PEG ratio of 1.1, so its earnings growth outlook is likely being undervalued as well. Best Buy also offers a healthy dividend yield of 2.5%. Finally, it belongs to a group in the top 1% of the Zacks Industry Rank, and we here at Zacks believe your best stocks tend to come from the best industries.

So to recap, we have a strong company with a robust balance sheet, detailed growth plans, historic holiday shopping potential, and cheap shares. All that, plus an improving earnings outlook, make BBY worthy of today’s Bull of the Day honor.

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