This Electronics Retailer Is Now a Better Buy

Best Buy  (NYSE: BBY  )  was one of the best investments for 2013. Shares were up over 250%, compared to the S&P 500's 30% return. However, things have been quite different so far this year--Best Buy is already down 40% year to date. The move comes as holiday sales failed to live up to expectations. 

Were holiday sales all that bad? 
Best Buy posted same-store-sales decline of 0.8% for the holiday period, which are the nine weeks ending Jan. 5. Investors were not happy with this number, but many have overlooked the fact that if you include online sales, the holiday season sales were up 24% year over year. Best Buy also has a few positives that should boost sales this year. First is its sales boost from the launch of the new gaming consoles. In addition, the company has made a shift from a brick-and-mortar retailer to a complete omni-channel retailer. This should help Best Buy to continue to gain market share from other brick-and-mortar retailers. This includes hhgregg, which released earnings guidance for the upcoming quarter that was below analysts expectations. hhgregg's comparable store sales also fell 11%, suggesting that Best Buy and other top-name retailers might be grabbing market share from the smaller players.

But there's still a lot of competition to fend off
No conversation about Best Buy is complete without mentioning Amazon.com  (NASDAQ: AMZN  ) . Amazon's services are convenient, its product offerings are comprehensive, and its shipping is free via its Prime service. The beauty of Amazon is that it has a vast number of reviews, which allows it to track its Prime customer preferences. With Prime, Amazon delivers to its customers in two days for free, while it takes Best Buy up to seven days. However, I do believe that Best Buy has an opportunity to capture some of Amazon's market share by lowering the number of days it takes to deliver its products. It can do this by using its stores as distribution centers.

Meanwhile, you also have the largest employer in the world, Wal-Mart  (NYSE: WMT  ) , which has a large presence in virtually every market, including electronics. Wal-Mart also had an aggressive holiday season with regards to pricing. Wal-Mart has also been investing heavily in its online business. It's building a couple of dedicated warehouses to focus on handling Internet orders and its e-commerce sales were up 40% year over year during the third quarter. On the other hand, Wal-Mart has been in the e-commerce business for over a decade, but it's still playing catch up to Amazon. E-commerce sales at Wal-Mart only make up a small part of its total revenue. Wal-Mart's online sales are just below $8 billion, while Amazon rakes in $61 billion via online sales.

So why choose Best Buy?
As far as valuation goes, compared to both Amazon and Wal-Mart, Best Buy is a much more compelling investment. Best Buy trades at around four times enterprise value-to-EBITDA. Wal-Mart trades at eight times and Amazon at 40 times. This recent pullback in the shares appears to be overexaggerated. Presenting investors with an attractive entry point into the stock. Best Buy is still paying a solid dividend, yielding nearly 3%, and it generates high levels of cash flow. Despite the concerns that  many consumers are now shopping online, Best Buy remains a key player in the electronics retail space. It's managed to grow its sales by 7% annually over the last five years. Although 7% is modest compared to Amazon, it still suggests that shoppers are finding value from Best Buy's brick-and-mortar presence.

Bottom line
Best Buy is still a turnaround story. Part of the weakness of the retail industry during the holiday season was six fewer shopping days compared to 2012, and adverse weather conditions, which put a strain on foot traffic. However, the long-term growth story is still intact for Best Buy. Shares trade at only 11 times next year's earnings and the company has over 25% of its market cap covered by cash on the balance sheet. Investors should consider Best Buy a solid growth and income play for 2014 and beyond.

Think Best Buy can take over retail?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they’re planning to ride the waves of retail's changing tide. You can access it by clicking here.


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