Update coverage of Best Buy Co., Inc. (BBY) on March 31st, 2013
Initial coverage was started on December 14th, 2012.
- Fundamental: The company is way over valued.(FAILED)
- Technical: The short term is volatile(5 day) the intermediate term is bullish(1 month, 3 month), The long term is volatile(6 month or beyond). (PASSED)
- Potential: There MIGHT be the ex-CEO or chairman to buy this company out.(SLIGHTLY POSITIVE)
- Trading: The average trading volume of the last 3 month is 11M, it is very easy to setup or dispose a position in this stock. (PASSED)
General Market Overview
The index is bullish as the 30 day moving average of 1,571.82 is above 120 day moving average of 1,495.50. The last cross over happened on Dec 28, 2012 with the direction of up.
The intermediate trend is bullish as current price is above 30 day moving average.
If the index is breaking down and goes below 1,548.19, we should consider it as a short term sale signal.If the index is breaking out and goes above 1,618.46, we should consider it as a short term buy signal.
Best Buy Co., Inc. operates as a retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances, and related services primarily in the United States, Europe, Canada, and China. The company?s stores offer video products, including televisions, e-readers, navigation products, digital cameras and accessories, digital camcorders and accessories, and DVD and Blu-ray players; and audio products, such as MP3 players and accessories, home theater audio systems and components, musical instruments, and mobile electronics comprising car stereo and satellite radio products. Its stores also provide computing and mobile phone products consisting of notebook and desktop computers, tablets, monitors, mobile phones and related subscription service commissions, hard drives and other storage devices, and networking equipment, as well as office supplies and other related accessories, such as printers; entertainment software products, including video gaming hardware and software, DVDs, Blu-rays, CDs, digital downloads, and computer software; and appliances, air conditioners, and housewares. In addition, the company offers service contracts, warranties, computer-related services, and product repair, as well as delivery and installation services for home theaters, and mobile audio and appliances; and snacks and beverages. It operates its retail stores and call centers, as well as online retail operations under various brand names, such as Best Buy, Best Buy Mobile, The Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Pacific Sales, and The Phone House. The company was formerly known as Sound of Music, Inc. and changed its name to Best Buy Co., Inc. in 1983. Best Buy Co., Inc. was founded in 1966 and is headquartered in Richfield, Minnesota.
Best Buy Co., Inc.
7601 Penn Avenue South
Richfield, MN 55423
United States – Map
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.10 Par Value — 338,087,851 shares outstanding as of November 30, 2012 .
As of March 21, 2013 , the registrant h ad 338,770,740 sh ares of its Common Stock issued and outstanding.
Revenue of 2010, 2011, and 2012 are $49243M, $49747M, $50705M respectively. Income of 2010, 2011, 2012 are $1317M, $1277M, $-1231M respectively. The net tangible assets is 2051M. The latest analyst estimates are 24 cents per share, a.k.a. an income of 81M on the revenue of $10660M for the quarter and 216 cents per share, a.k.a an income of 730M on revenue of $48350M for the year. The estimation for 2014 is 234 cents per share. The revision of estimation is down.
Revenue of the latest quarters are 17335M, 11610M, 10547M, 10753M, 16711M, 10660M(estimated), while incomes are -1727M, 158M, 12M, -10M, -409M, 81M(estimated).
The speculative value currently is $5435M. Using the non-discount, non-growth model, the company would NEVER be able to accumulate the value using its income. However due to the revenue loss by 4%, and high fixed cost, it is a high bar for BBY to maintain this value.
We recently analyzed and evaluated Best Buy’s (BBY) recent quarterly results and needless to say Best Buy has a long way to go before it regains the momentum that it previously held during the last decade. In an attempt to recreate the beautiful symphony of sales and profit growth that Best Buy enjoyed from 2003-2008, BBY’s Founder and Former CEO Richard Schulze has been floating the idea of acquiring the 80% of BBY that he doesn’t own as part of a potential leveraged buyout in partnership with a consortium of private equity investors. Schulze first floated the idea of buying out BBY at $24-26/share in August, three months after he was forced out as Chairman by BBY’s board in the wake of the Brian Dunn scandal. Many analysts expected BBY’s Interim CEO George Lawrence Mikan III (grandson of Minneapolis Lakers basketball legend George Mikan) to replace Dunn as CEO but the board ended up hiring Hubert Joly away from Carlson instead. According to the Star Tribune, Hubert Joly had close ties to Former BBY CEO Brad Anderson and Brad Anderson is Dick Schulze’s right-hand man and protégé. After months of rumors and speculation, Schulze had a “hard deadline” to make a bid by Sunday December 16th, 2012 and is expected to make a fully financed offer to purchase Best Buy by the end of the week and Schulze is expected to present a bid that is worth $5B-$6B.
BBY’s share price had declined by 33% since we began covering it back in August and while we were concerned about the deteriorating fundamentals of the company, we did not ignore the potential for a deal by Dick Schulze and his group. The market is somewhat pleased that Schulze is potentially presenting a formal bid and it bid Best Buy’s shares up by 15% on December 13th, 2012. Schulze originally outlined a $24-$26 per share bid for Best Buy during the summer however Best Buy’s sales slump and margin compression in 2013 has resulted in its stock price sagging as well as the expected price that Best Buy’s shareholders could realize from a potential deal. As recently as November, there was speculation that BBY would be acquired by Schulze and his group at about $18/share to $20/share. With the recent news that Schulze is looking to present a potential bid of $5B-$6B, that represents a per share bid of $15-$18 per share for the company, which represents a decline of 30%-38% relative to the initial proposed bid outline price in the summer.
Deutsche Bank analyst Mike Baker expected that a potential deal for Best Buy would have been financed by 30% equity and 70% from debt, which would include Best Buy’s current net debt of $1.6B. Because Schulze owns 20% of Best Buy’s outstanding shares, we would not expect Schulze to require much in terms of additional equity financing. Schulze was originally given a 60 day period around the beginning of September to perform due diligence, with a 30 day extension if good faith progress was being made. The most notable private equity firms within the Schulze group included Cerberus, Leonard Greene & Partners and TPG Capital. Schulze’s top two advisers include Best Buy’s former President Al Lenzmeier and his protégé Brad Anderson. Schulze requested the 30 day extension from the original deadline of Mid-November to see how Best Buy’s holiday numbers would hold up.
Best Buy’s board may not necessarily accept a bid from the Schulze group even if Schulze presents a bid on Friday. Best Buy’s board could reject the offer and under the original negotiating terms between the two parties, Schulze can make a second offer in January if the board rejects his initial bid and a source close to Schulze is expecting the board to reject Schulze’s initial bid.
In conclusion, we like the fact that Best Buy has been beaten down so badly that it was getting cheaper by the hour. While we have no illusions that Best Buy’s share price has been beaten down due to the deteriorating fundamentals at the company, we believe that investors can’t be so focused on fundamentals that they can’t take a fair and balanced look at extraordinary events such as a potential bid by a company founder. We think that Best Buy’s best course of action would be to accept a bid that Schulze and his group put together and to let Best Buy be Dick Schulze’s problem.
Disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.