So far, Best Buy (BBY) stock has generated stellar returns this year. The stock has risen about 63% YTD (year-to-date).
Best Buy stock outgrows broader markets
In comparison, the S&P 500 has risen 27.4% this year. Notably, Best Buy stock has also outpaced most of its retail peers, including Walmart (WMT), in terms of growth.
Walmart stock has risen about 30% YTD. However, the stock is lagging Target (TGT) stock, which has risen 94.3% YTD.
Best Buy stock is trading near its 52-week high of $868.86. Meanwhile, the stock is trading nearly 81% higher than its 52-week low of $47.72.
The stellar growth in Best Buy stock is due to its robust financial performance this year. Best Buy continues to post healthy comps growth in the domestic market. Also, the company has a strong history of positive earnings surprises.
Best Buy’s bottom line beat Wall Street’s expectations by a wide margin over the last several quarters. In the first three quarters of fiscal 2020, Best Buy beat analysts’ estimates by an average of 12.2%, which is encouraging.
During the last reported quarter, Best Buy’s sales beat analysts’ estimates due to growth in the domestic business. Meanwhile, the company’s bottom line beat the consensus estimates and registered 22% growth. Best Buy’s digital efforts are paying off. The company’s domestic online revenues increased 15% last quarter. The company raised its fiscal earnings guidance, which drove its stock higher.
Similar to other retailers, Best Buy faces headwinds from the US-China trade war. However, tariffs haven’t impacted Best Buy until now, which is positive.
Besides the strong financial performance, Best Buy boosted shareholders’ returns through share repurchases and dividends. Best Buy has repurchased $700 million worth of shares YTD. Meanwhile, the company remains on track to buyback shares worth $750 million–$1 billion in fiscal 2020.
Best Buy stock could gain from holiday sales
We think that Best Buy remains well-positioned to benefit from the holiday season. The company’s marketing and compelling promotions, inventory position, and shopping convenience will likely drive its top-line growth.
Best Buy’s efforts on the fulfillment side could result in higher sales. The company’s free next-day delivery and no membership and minimum purchase requirements will likely drive its traffic. Also, Best Buy provides same-day delivery in 42 markets.
To add to shoppers’ convenience, the company provides in-store pickup. Most of the orders are ready to be picked up within one hour. Best Buy also offers curbside pickup at some of its stores.
We think that higher competition will likely pose challenges. However, Best Buy’s digital initiatives could support its domestic comps growth and its stock.
Valuation and analysts’ rating
Best Buy stock trades at a forward earnings multiple of 13.9x, which is well below the peer group average of 20.7x. The company’s valuation seems to be in a comfortable zone with mid-single-digit growth expectations and consistent dividends and share buybacks.
However, we expect Best Buy’s margins and EPS growth to soften a bit in the near term, which could limit the upside in the stock.
Best Buy annualized its GreatCall acquisition in October, which won’t boost the margins more. Higher fulfillment and installation costs and an unfavorable mix will likely hurt the gross margins.
Also, the company faces tough year-over-year comparisons in fiscal 2021, which could limit the EPS growth rate.
Most of the analysts maintain a “neutral” outlook on Best Buy stock. The stock is trading almost on par with analysts’ consensus target price of $85.93.