Down 13%, Is Best Buy Stock a Buy?

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Despite reporting overwhelmingly positive second-quarter results last month, shares of consumer electronics retailer Best Buy (NYSE: BBY) tumbled. The stock is down about 13% from its peak, a reaction that doesn't mesh with the numbers.

Comparable sales soared 5.4%, the best performance in years. Online sales growth accelerated to 31.2%, proving once again that that the company is capable of going toe-to-toe with Adjusted earnings per share climbed 21% to $0.69, a product of higher sales and lower operating costs relative to revenue. Full-year revenue growth guidance was boosted to 4%, up from a previous outlook of 2.5%, and operating income growth guidance was raised to a range of 4% to 9%, up half a percentage point.

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What led investors to punish the stock? There were two things that seem to have contributed. First, Best Buy CFO Corie Barry, in the earnings press released, disclosed that the company planned to make additional investments during the third and fourth quarters beyond what it had previously settled on. The prospect of higher costs down the road may have rubbed investors the wrong way.

Second, Best Buy CEO Hubert Joly threw some cold water on the company's performance during the conference call, saying that mid-single-digit comparable sales growth is not the new normal. With the company guiding for 4.5% to 5.5% comparable sales growth during the third quarter, this implies that the holiday quarter may not be nearly as impressive.

Even down 13%, Best Buy stock is still up nearly 27% this year, and it's up more than 350% since the beginning of 2013. Is this dip a buying opportunity? Or has Best Buy's epic rally run out of fuel?

Still a cheap stock

Best Buy's turnaround over the past few years has been an unmitigated success. In 2012, Best Buy could have easily become the next Circuit City if it pursued the wrong strategy. Thankfully for investors, Joly's "Renew Blue" focused on the right areas. The company slashed unnecessary administrative costs, made its prices more competitive, and invested in e-commerce, with initiatives like shipping online orders directly from stores. The result has been soaring profits.

Even after more than quadrupling from its low point, Best Buy stock still looks attractive. Over the past twelve months, Best Buy has produced GAAP earnings per share of $3.78, putting the price-to-earnings ratio at about 14.4. That's higher than the beaten-down valuations afforded to many struggling retailers, but Best Buy is performing far better than most of its peers.

This ratio ignores the fortress balance sheet Best Buy has built up throughout its turnaround. Thanks in part to its exit from most international markets, and despite heavy spending on dividends and share buybacks, Best Buy has accumulated $3.5 billion of cash, cash equivalents, and short-term investments. With just $1.35 billion of debt, that leaves the company with a net cash position of roughly $2.15 billion. Back that net cash out, and Best Buy stock trades for just 12.6 times earnings.

Earnings growth gets harder from here on out

Keeping up the current double-digit pace of EPS growth will be difficult. Costs have already been slashed – the company cut out more than $1 billion of fat during its turnaround, and at this point it will be tough to lean down much further. Much of those savings were invested in growth initiatives, and Best Buy will need to keep investing in e-commerce to keep up with the competition.

But Best Buy's discount valuation doesn't bake in much earnings growth at all. Even fairly meager comparable sales growth combined with continued cost discipline and share buybacks should produce more than enough earnings growth to justify the stock price. Anything more than that is gravy.

Investors shouldn't expect Best Buy's blockbuster second quarter to become the norm, but it won't take world-beating results to drive the stock higher. And Best Buy's cash-rich balance sheet should allow it to survive nearly any storm, unlike many debt-laden retailers flailing through the ongoing upheaval in retail. The bottom line: The 13% post-earnings drop in Best Buy's stock price is a buying opportunity.

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Timothy Green owns shares of Best Buy. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.