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Stock Analysis & Ideas

Best Buy Stock: Deep Value and Decent Dividends

Story Highlights

Rock-bottom expectations have fanned the bearish flames for Best Buy stock in 2022. However, don’t Best Buy out as the company’s recent statistics might surprise you, plus there’s something enticing for value and income investors.

Minnesota-headquartered Best Buy (BBY) operates a chain a retail technology product stores in North America. I am bullish on the stock.

When many investors despair, it’s time to get bullish. This isn’t true for all companies and stocks, but overwhelming pessimism surrounding a good company can produce a rare buying opportunity.

A perfect example of this is Best Buy stock. The company has an online presence, but Best Buy suffered from the “retail wreckage” that beset many brick-and-mortar retail businesses during the onset of COVID-19.

Should investors abandon Best Buy stock after its share-price collapse? It might be tempting to abandon ship, but remember: When the expectations are dismal, that’s when surprising turnarounds can happen. After all, when the bar is set low enough, a company like Best Buy just might over-deliver.

Besides, Best Buy stock offers a terrific value (according to a traditional metric, at least) and the company isn’t afraid to reward its loyal shareholders. At the end of the day, delving into the latest data should uncover a retail business that’s prepared to defy expectations and deliver surprising results.

Little Hope for Best Buy

To start off, we can get some value-focused investors into the fold by glancing at Best Buy’s P/E ratio. Just recently, that number was 7.38, which indicates a bargain that might not last much longer.

Next up, income-oriented investors should want to know that Best Buy pays a forward annual dividend yield of 4.86%. This is fairly generous, and it’s the icing on the cake for buy-and-hold investors of Best Buy stock.

Still, those numbers might not be very enticing if Best Buy can’t deliver decent fiscal figures. In the lead-up to Best Buy’s quarterly data release, some folks offered scarcely any hope that the company would deliver acceptable results. Among their concerns was the high U.S. inflation rate, which might cause shoppers to forgo big-ticket purchases and only buy essential goods.

Jason Benowitz, senior portfolio manager at Roosevelt Investment Group, has observed inflation weighing on discretionary purchases, “particularly among low-income consumers.” Benowitz also noted a “material shift in consumption from goods to services and demand for large ticket items appear to have suffered the most from this shift.” Of course, these factors have contributed to Wall Street’s sour outlook on Best Buy in 2022.

It should be acknowledged, though, that Best Buy is attempting to address high inflation by appealing to bargain hunters. To achieve this, Best Buy plans to double its number of outlet stores to 32. The company’s outlet stores are known for offering discounts on televisions and major appliances. Additionally, Best Buy reportedly plans to add an outlet deals section to its website.

However, along with inflation, Best Buy has also had to contend with ongoing supply-chain issues, which have undoubtedly made it more difficult to keep in-demand tech gadgets in stock. This consideration may have been top-of-mind for Telsey Advisory Group, which cut its price target on Best Buy shares by $40, to $88 per share.

Confident and Excited

In this context, Wall Street’s experts weren’t particularly hopeful that Best Buy would deliver strong quarterly figures. Thus, data from Refinitiv indicated analysts’ expectations that Best Buy’s first-quarter sales would decline 11% to $10.41 billion, and that the company’s earnings per share would fall 28% to $1.61.

In contrast, Best Buy CEO Corie Barry assured that he is “confident in the strength of our business and excited about what lies ahead.” Barry’s confidence and excitement are justified as Best Buy’s just-reported Q1 2022 revenue of $10.647 billion beat the aforementioned $10.41 billion estimate as well as the FactSet-derived consensus estimate of $10.382.

Moreover, Best Buy’s first-quarter 8% year-over-year decline in enterprise comparable sales compared favorably versus the FactSet-cited consensus estimate of a 9.1% decline. In other words, the company’s Q1 results weren’t ideal, but they were still better than the experts had anticipated they would be.

So, how will the full fiscal year shape up for Best Buy? There’s no way to know for certain, but Best Buy issued fiscal-year 2023 revenue guidance of $48.3 billion to $49.9 billion, which is slightly lower than the prior guidance of $49.3 billion to $50.8 billion.

Hence, while Best Buy may be confident and excited, the company is also realistic. Taking macroeconomic headwinds (supply-chain bottlenecks, inflation) into account is a smart move, as it helps to establish attainable goals for the future.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, BBY is a Moderate Buy, based on six Buy, seven Hold, and one Sell ratings. The average Best Buy price target is $97.87, implying 33.21% upside potential.

The Takeaway

Best Buy’s quarterly results indicate that the company’s revenue is stronger than the experts may have expected. It’s a great sign, especially during a time of persistent macro-level challenges for the retail sector.

Meanwhile, Best Buy stock is trading at a very reasonable valuation and the company offers generous dividend payouts. All in all, investors have valid reasons to consider a moderate position in Best Buy stock as the company seems prepared to face its challenges throughout the year.

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