Is Best Buy’s Stock a Best Buy?

Where do you go to make electronics purchases? Fifteen years ago, that question would have been easy for me to answer. I make a trip to my local Best Buy (NYSE: BBY  ) , browse the aisles for a while adding way more than I ever intended to purchase before picking up my targeted item and heading home.

But today the answer is much more complicated than that. Best Buy’s bread and butter electronics are everywhere. Target (NYSE: TGT  ) and Wal-Mart (NYSE: WMT  ) provide electronics along with milk and eggs while online retailers like Amazon.com (Nasdaq: AMZN  ) and eBay (Nasdaq: EBAY  ) provide selection, great prices, and home delivery.

During a recent rare trip to Best Buy I found myself wondering if it offered anything I couldn’t pick up on my regular Target trips. Outside of a camcorder or a random audio cable there wasn’t much I could think of that I would rather buy at Best Buy. DVDs, computers, TVs, cell phones, and audio equipment can be found almost anywhere and often at better prices.

So if Best Buy doesn’t have a solid competitive advantage, the question becomes whether the stock provides enough value versus the risk the company can’t survive. After all, its biggest competitor, Circuit City, has already bit the dust.

You could look at its trailing P/E ratio of 9.9 or a forward P/E ratio of 8.3 as reasonable values. For the last 10 years revenue has increased and the company has been profitable. And management continues to buy back shares and pay a nice 2.1% dividend. If you didn’t know Best Buy’s competitive position was deteriorating, these numbers might scream, "BUY BUY BUY!"

But I am more concerned about a falling return on assets for the company. Best Buy puts a lot of money into building stores and if the return on those stores is falling while store count is growing the company is throwing good money after bad.

 

2007

2008

2009

2010

Return on Assets

10.3%

8.8%

8.4%

8.1%

As you can see above, the trend isn’t headed in the right direction and the trailing return on assets of 8.1% is well below the five-year average of 9.1%.

Despite seemingly attractive earnings multiples and management returning cash to shareholders, I don’t see Best Buy’s stock as a buy right now. With Amazon, Target, Wal-Mart, and others providing more competition than Circuit City ever did, Best Buy may just wander forward as another ho-hum electronics retailer. And I’ll reminisce about how excited I used to be to go to Best Buy back in the good old days.

Interested in reading more about Best Buy? Click here to add it to My Watchlist, and My Watchlist will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Best Buy and Wal-Mart are Motley Fool Inside Value choices. Amazon, Best Buy, and eBay are Stock Advisor recommendations. Wal-Mart is a Global Gains pick. Wal-Mart is an Income Investor pick. Motley Fool Options has recommended a diagonal call position on Wal-Mart. The Fool owns shares of Best Buy and Wal-Mart. 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.


Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 07, 2011, at 3:21 PM, AllanEdwards998 wrote:

    First of all Best Buy sells online and its online business is 6% the size of Amazon's entire business and grew 14% last year.

    Second of all Wal-Mart is a competitor as is Target. All companies are competitors to eachother. If you would rather buy a computer or TV there that is your preference, The selection obviously is not as good, nor is the response. And you should know the company has had booming revenue growth since 2000 despite this increasing competition.

    Lastly are ROA's possibly going down because of a recession? I think so. Unemployment is just starting to come down.

  • Report this Comment On April 07, 2011, at 7:40 PM, IRunMan wrote:

    Best Buy is still my first stop. There is something to be said for seeing gadgets in person and being able to touch them. There selection on TVs, computers, many other things is much better and includes higher-end equipment than Target, Walmart and similar. Some of the Walmart's I visit to purchase other consumables are slightly dirty and don't have the clean, modern appearance of Best Buy.

    Some things I search online first, then see who has the best price. If I was buying a well-know commodity that everyone carries, I probably won't go to Best Buy ( I went to Walmart to get my Ipod nano ).

    I'm still excited to walk into a Best Buy and explore their stuff. My gut feeling walking into Walmart is "alright...how long is this gonna take?"

  • Report this Comment On April 07, 2011, at 10:03 PM, MichaelHamilton wrote:

    I go to best buy to buy my equipment, it is quicker and more fun than doing it online. Why wait a week for the new laptop to be delivered when I can get it today at best buy. Best buy has a better selection than walmart and target and I don't think it is more expensive for what you get.

  • Report this Comment On April 08, 2011, at 11:58 AM, Risky88 wrote:

    I agree with the author.

    Most of the time when I walk in there is more employees than customers. I would definatly say Best Buy is way over priced.

    There is a certain amount of the market that is attracted to straight price and certain amount of the market that will pay a little more for better service.

    To me Best Buy has neither in my opinion. I bought a 42 inch tv three months ago from Amazon.com for 550$ BBY wanted the same thing for 900$.

    Not to mention I got free 2 day shipping just for being a student and if the price of the tv went down within 2 weeks of when I bought it amazon would pay me the difference to make sure I still got the best deal. When you have a place like amazon giving service thats fast easy and convient with low prices its no wonder their share price is more than doubled in the last three years and BBY, well just look at the chart during the "recession".

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