Why Oppenheimer Considers Best Buy Co., Inc. to Be Electric

Source: Best Buy.

What: Shares of big-box electronics and appliances retailer Best Buy caught fire on Friday, rising 3.5% to close at $37.36 after research firm Oppenheimer upgraded the company.

So what: According to Brian Nagel, the analyst at Oppenheimer covering the company, Best Buy is going to continue facing a challenging retail environment, but "the worst is likely over." Nagel and Oppenheimer's view is that Best Buy's new management team has done a good job of reducing costs and improving the company's strategic position in order to succeed over the long term.

Additionally, Nagel suggests that the recent bankruptcy filing from RadioShack, along with ongoing weakness in Sears Holdings, bodes well for Best Buy, which could pick up significant market share in the electronics category. As a refresher, RadioShack filed for chapter 11 bankruptcy protection last week, and agreed to sell as many 2,400 stores to General Wireless.

All told, Nagel moved his company's rating on Best Buy from "perform" (the equivalent of a "hold") to "outperform," with a price target of $43. Based on Friday's closing price this implies further upside potential of 15%. Nagel suspects management may have set the bar low for the first half of 2015 and believes Best Buy is now set up to surpass expectations.

Now what: The question that has to be asked here is this: Does Oppenheimer's upgrade makes sense?

While Best Buy is far from the growth story it once was, I'm going to have to agree with Oppenheimer that I like what I'm seeing from turnaround specialist Hubert Joly and the rest of his executive team.

Source: Best Buy.

Best Buy has set some very lofty goals over the past three years in terms of cutting costs and driving traffic. This plan has included the closing of 50 big-box locations in favor of opening 100 mobile-focused stores, as well as price-matching Amazon.comin order to cut down on "showrooming," or the process by which consumers try out a product in-store then purchase it for a lower price from an online vendor. Wise investments in expanding Best Buy's online offerings have also helped boost its bottom line.

The proof is in the pudding based on Best Buy's holiday sales report. For the nine-week period ending Jan. 3, 2015, Best Buy saw comparable sales increase 2.5% from the previous year, with domestic comparable-store sales up an even more impressive 3.4%. Its online segment also delivered impressive comparable gains of 13.4%.

While I personally remain bullish on Best Buy's future as it becomes more nimble, I also am a realist and don't expect it to head too much higher without first proving its market share gains are sustainable. But for existing shareholders the company's 2.1% yield and forward P/E of 15 look reasonable and worth hanging onto.

The article Why Oppenheimer Considers Best Buy Co., Inc. to Be Electric originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of, and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.