Investors Shouldn't Underestimate This Electronics Retailer In 2014

The fear that Amazon was going to render the electronics retail industry obsolete was all but dismissed in 2013, and there's one electronics retailer that appears to have room for even more upside in 2014.

Jan 22, 2014 at 2:05PM

 From trading in the low teens back in 2012 to nearly touching $45 per share just a few weeks ago, Best Buy (NYSE:BBY) has certainly performed well for investors who bought the stock in its darkest days. However, investors who owned the stock in 2010 and into 2011 are just now getting back to even. Thus, the real question for Best Buy is what 2014 will bring. Will we see even higher share price levels, and is there still money to be made for new investors?

The price war wages on                                                                                                                                                                       In many sectors one major retailer operates in the space. One retailer that has established itself as a leader. Much like what Dick's Sporting Goods has done in the sports space and what Tractor Supply has done in farm goods, Best Buy has established itself as a leader in the electronics space. Look for Best Buy to continue battling on the price war battlefield. Best Buy's price match initiative has helped the company gain back some market share. Another big Best Buy initiative is buy online, pickup at store.

Best Buy is also optimizing its store portfolio by closing certain stores and revamping other stores, which includes its store-in-a-store concept. Store-in-a-store locations give major manufacturers, such as Samsung, access to valuable retail space. Space that online retailers can't give them. Samsung has already opened some 1,400 "Samsung Experience Shops" in Best Buy stores.

Best Buy is also gaining traction with its own online sales. Domestic online sales during the fiscal third quarter of 2014 were up 15% year-over-year as the electronics retailer saw impressive increases in traffic. There are also opportunities to further drive online sales by boosting Best Buy's interface.

Unlike another major electronics retailer, GameStop, Best Buy has a strong portfolio of products. GameStop has a lot of exposure to the used game industry. That's a big negative for the company. GameStop should be greatly affected by the rise of digital and online gaming.

Amazon.com is still on the prowl. It has no issues with sacrificing earnings for revenue. This trend is likely to continue, which means that Best Buy will have to continue to be proactive when it comes to innovation and closing customers -- which means that it converts traffic into paying customers and reduces the amount of showrooming that takes place in its stores. 

In any case, investors are still able to buy Best Buy at a cheap multiple. The stock trades at just over 13 times forward earnings and at a 6.5 times enterprise value to earnings before interest, taxes, depreciation, and amortization multiple.

Bottom line                                                                                                                                                                                             Best Buy has had one of the best runs over the last year of any major S&P 500 stock, as it's up over 200%. Just under a year ago, investors could have snatched up Best Buy, not only in the teens, but with a near 5% dividend yield. Its dividend yield is still fairly solid at 1.8%, and this is at less than a 40% payout ratio.

Investors should consider Best Buy an advantageous risk/reward investment for 2014. Its strong free cash flow profile supports its dividend and its ability to match prices. Meanwhile, Amazon appears to be just too expensive.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com and GameStop. 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.

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