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Best Buy: When Exits Don't Help Value (BBY, AMZN, WMT, TGT, RSH)

Best Buy Co. (NYSE: BBY) is facing yet one more tough reception of a company action after news that the electronics manufacturer is buying out its British partner of its U.S. mobile phone joint venture.  With so much direct competition from the carriers and from the likes of Amazon.com Inc. (NASDAQ: AMZN) for its electronics businesses, nothing seems to go right at Best Buy.

The exit cost for Best Buy is $1.3 billion for the U.S. and Canada, but the two are also dropping plans to put up new European megastores together. Best Buy is facing a tough road today.  The company looks to be focusing on the core-U.S. business, but we have no real growth in America anymore.  Best Buy had previously dumped its expansion plans to grow in China and Turkey.

Today’s news, in part, should be good news.  The company will now no longer have to share half of its profits from the wireless sales.  Still, cutting back on expansion in more markets means that things are not as rosy as investors might hope.  Everyone knows the problems in Europe, but to throw in the towel now means that the company either expects a troubled environment in Europe to persist or that it just won’t be able to adequately focus its efforts in the key U.S. market while it fights for business with Amazon.com and Wal-Mart Stores Inc. (NYSE: WMT).  Even Target Corporation (NYSE: TGT) is getting better at selling the new top phones around carriers, so there is just one more seller to watch.

There used to be rumors that Best Buy was interested in acquiring Radio Shack Corporation (NYSE: RSH).  We’d put those further and further into what illiterates might call the “used to would” category.

At least the employees of the cellular area will be able to do more things elsewhere.  Unfortunately, there is a risk that those employees could be distracted from the more profitable areas of the business. Best Buy shares remain cheap at close to 7.5-times a blended forward earnings estimate.  The problem is that there is no real growth if it is paring back its international expansion, so no one is going to pay much for this earnings stream.

Best Buy shares are down 3.3% at $26.41 late in the day and the 52-week trading range is $21.79 to $45.63.

 JON C. OGG

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