Is Best Buy Stock a Buy After Earnings?

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Best Buy (NYSE: BBY) released its third-quarter earnings results and fourth-quarter outlook on Thursday, and investors weren't thrilled with what they saw. Earnings per share (EPS) surged 30% year over year, to $0.78, at the consumer-electronics giant, just meeting the average analyst estimate.

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However, the company's Q4 earnings per share (EPS) guidance range of $1.89-$1.99 fell short of the $2.03 that analysts were expecting. As a result, Best Buy stock fell more than 7% in morning trading before recovering somewhat as the day progressed.

Despite Best Buy's lukewarm holiday-quarter guidance, the company is well-positioned to grow its earnings over the next few years, in line with a plan management unveiled back in September. With the shares now trading at a more reasonable valuation, this could be a good time for investors to look at Best Buy stock.

The results and outlook in brief

Prior to this fiscal year, Best Buy had posted domestic comparable-store sales growth of 1%, or less, for three straight years. That followed several years of steady comp-sales declines. However, Best Buy's comp-sales growth has accelerated dramatically in fiscal 2018.

For the third quarter, Best Buy reported a 4.5% increase in domestic comp sales, along with total comp-sales growth of 4.4%. That brings its year-to-date comp-sales growth to 3.8% in the domestic market and 4.2% outside the U.S. Best Buy achieved this robust growth despite the negative impact of temporary hurricane-related store closures during the quarter, as well as the later-than-expected iPhone X launch.

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Strong sales growth allowed Best Buy to continue expanding its operating margin in the key domestic segment, driving the 30% increase in EPS.

Best Buy also boosted its full-year guidance. It now expects adjusted operating income to rise 7%-9.5% year over year compared to its previous forecast of a 4%-9% increase. Still, this implies that EPS will be roughly flat year over year in the fourth quarter, due to promotions like free shipping with no minimum purchase. That's why many investors were disappointed and dumped Best Buy stock on Thursday.

Plenty of growth opportunities ahead

Best Buy has routinely beaten its forecasts over the past year. But for the hurricanes and the timing of the iPhone X launch, it probably would have continued that streak last quarter. Thus, the company's fourth-quarter guidance may be overly conservative. However, even if there is a pause in EPS growth this quarter, Best Buy's profit growth will probably resume before long.

The company's "Best Buy 2020" growth strategy points to a number of areas where Best Buy can look for future revenue growth. Smart-home products and services are two key areas where Best Buy may be able to exploit its competitive advantage in catering to consumers who want a "high-touch" experience.

Best Buy also sees opportunities to gain market share in some of its existing categories. This year, the company has profited from the demise of two smaller competitors: hhgregg and RadioShack. The tailwind from those bankruptcies will continue into early 2018.

Meanwhile, Best Buy is also stealing share from Sears Holdings (NASDAQ: SHLD) at a rapid rate. Despite years of sales declines, Sears was still the No. 3 appliance retailer in the U.S. last year. That means there will be billions of dollars of revenue up for grabs in the next few years, as Sears downsizes -- and in all likelihood, goes out of business.

Last quarter, Best Buy posted a stellar 13.5% comp-sales increase in the appliance category, indicating that it's already capitalizing on this opportunity. Now that Sears has been forced to stop selling branded appliances from U.S. market-leader Whirlpool, Best Buy has a big opportunity to make further gains next year. Sears Holdings is cutting back on consumer electronics sales, as well, which also will help Best Buy's revenue-growth efforts.

Best Buy stock is reasonably priced

Based on its current guidance, Best Buy is on track to produce EPS of about $4 this year. With Best Buy stock now down about 13% from its 52-week high, the company carries a fairly modest valuation of 14 times earnings.

The company's official growth roadmap calls for EPS to reach $4.75-$5.00 by fiscal 2021 -- which roughly coincides with the 2020 calendar year. However, given management's performance over the past several years, it seems likely that this is a conservative target.

In addition to modest sales growth and margin expansion, share buybacks could create upside to Best Buy's long-term EPS forecast. CFO Corie Barry revealed in the Q3 earnings release that Best Buy now plans to repurchase $2 billion of stock this year. That implies more than $800 million of repurchases this quarter, which equates to roughly 5% of the company's market cap.

Best Buy ended last quarter with net cash of $2 billion, after working to fortify its balance sheet for years. With its earnings power now stable, the company can safely ramp up its buyback activity if Best Buy stock continues to struggle. As a result, Best Buy shares look like a good value, especially if the stock continues to pull back in the next few weeks.

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Adam Levine-Weinberg has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.