Best Buy Co. Inc. (NYSE: BBY) is doing something that many investors might have considered more than difficult.  Its shares are actually rallying after an earnings report.  If you just read the headline data it would be easy to say that the company is just a mature story where contraction is being seen.  Our take: Don’t be fooled, there is value in Best Buy stock.

We want you to consider Best Buy with a few other companies before deciding for yourself if there is value here or not.  Companies which have to be considered are The Home Depot, Inc. (NYSE: HD), Staples, Inc. (NASDAQ: SPLS), Wal-Mart Stores Inc. (NYSE: WMT), Costco Wholesale Corporation (NASDAQ: COST), and even the little dog of a company called RadioShack Corp. (NYSE: RSH).  Gross margin is going to be an ongoing concern here for Best Buy, but this is true for many retailers right now and at some point the value can reflect gross margins.  We would note the same issue for rival Amazon.com Inc. (NASDAQ: AMZN) and its shares had previously rallied during the time that its margins kept contracting.  Arguably, Amazon is still Best Buy’s biggest thorn in its side but its valuations are so much higher that we did not compare to the brick-and-mortar retail segment today.

The electronics and in-home appliances retailer reported that comparable store sales fell by 1.7% from a year ago and that earnings fell by almost 3% to $0.35 EPS.  The report was on a mere 1.4% gain in revenues from last year to $10.94 billion.  Thomson Reuters was looking for estimates of closer to $10.7 billion in sales and only $0.33 EPS.  In short, the pessimism had grown too large from analysts as the shares have been in a steady state of decline.

Best Buy’s growth is coming from its online channel sales with almost a 12% gain in the U.S.  The weak spots were in TVs, digital imaging, and media sales.  The other addition is that Best Buy’s International segment growth was up about 6% net.

What will likely act as a further floor-building effort for the stock is the fiscal 2012 guidance (January end).  Best Buy reaffirmed $3.30 to $3.55 EPS and Thomson Reuters had estimates of $3.46 EPS.  It also sees 2012 revenues of $51.0 to $52.5 billion versus $51.8 billion expected by analysts.  Things had been weak enough in the stock that the company did not have to “beat and raise” to keep investors happy.  This was a “playing horseshoes and throwing hand grenades” analogy where hitting the target exactly is not necessary.  Close enough counts.

Another issue is that Best Buy repurchased some $505 million to buy back about 16.6 million shares of its common stock.  The average price was at $30.43 per share in the quarter and the company has nearly $800 million left to buy stock back.  We would rather see Best Buy commit to a higher dividend than buying back more stock, but it does already offer a competitive payout with a dividend yield of more than 2.0%.  We will expect a hike from $0.15 per quarter today to $0.16 or $0.17 per quarter in the next one or two quarters.  A dividend of $0.75 annualized would still far less than 25% of its adjusted income paid out as a dividend.

At the low-end of Best Buy’s projection it trades at a mere 9-times earnings expectations.  With a coming dividend hike being likely, with the company buying back stock, and being cheaper than many retail peers, we see plenty of value.  The company more than matches up to other retail segment leaders, and trying to consider that RadioShack has cheaper multiples is just too difficult to justify due to its permanent problems that are in place there.

Company/Stock	Price	Target	Forward P/E	Dividend
Best Buy Co. Inc. (NYSE: BBY)	$29.81	$36.15	9	2.01%
The Home Depot, Inc. (NYSE: HD)	$34.51	$41.10	12.9	3%
Staples, Inc. (NASDAQ: SPLS)	$15.08	$19.75	9.6	2.7%
Wal-Mart Stores Inc. (NYSE: WMT)	$53.13	$61.00	10.8	2.8%
Costco Wholesale Corporation (NASDAQ: COST)	$79.11	$81.77	20.5	1.2%
RadioShack Corp. (NYSE: RSH)	$12.81	$17.00	7	2%

At $29.80, its 52-week trading range is $28.09 to $45.63 and its market cap is almost $11.6 billion.  Shares gapped up too high this morning on the news at $31.11.  We did not want to cheer so much on a gap up of almost 8% from the $28.82 close yesterday.  Analysts still have a consensus price target north of $36.00 on Best Buy and that implies more than 20% upside for a stock that would have to rally more than 50% just for its stock to challenge its 52-week high.

Speaking of value investing, we just screened some large and well known value funds and value ETFs for investors yesterday.

JON C. OGG

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