What happened
Shares of Best Buy (BBY 0.73%) gained 11.3% last month, according to data provided by S&P Global Market Intelligence. For perspective, the S&P 500 rose 6.44%.
To be clear, there wasn't any company-specific news to drive the stock higher. Best Buy tanked 16% in May, despite a solid quarterly earnings report. That left the stock entering June trading for a low forward P/E of 11 times. As investors' fears over the impact of tariffs on China eased a bit, the broader market drifted higher.
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With Best Buy continuing to report strong results, the valuation clearly was a factor in sending the stock higher last month, and one analyst thinks the stock is still undervalued.
So what
In late May, the electronics retailer reported better-than-expected first-quarter results, with non-GAAP (adjusted) earnings per share up 24% year over year and enterprise comparable-store sales growth at the high end of guidance, coming in at 1.1% year over year.
Investors have been concerned about the impact tariffs might have on consumer spending, which obviously would affect a large retailer like Best Buy. Management eased those concerns by stating that it is working to mitigate potential higher costs it might incur, including by providing input for the Trump administration on ways to do tariffs that limit the harm to consumer spending.
The effect so far has been minimal on Best Buy's business. Management said many of the products that were on the previous list of tariffs that went into effect last year were mainly accessories and totaled only about 7% of the company's cost of goods sold.
Now what
The company reiterated previous guidance for fiscal 2020 (ending in early February), which includes the estimated impact of going from 10% to 25% tariffs. Management is calling for revenue to be flat to 2.3% higher, while adjusted EPS is expected in the range of $5.45 to $5.65, slightly up from $5.32 in fiscal 2019.
The guidance doesn't show a lot of growth on the top and bottom lines, but investors don't need to see much growth with the stock trading at a low valuation.
Looking beyond the short term, Best Buy has several growth catalysts, including ongoing technology innovation to drive electronics sales, the rollout of the in-home adviser program, and the entry into addressing health needs with the acquisition of GreatCall. Best Buy also continues to focus on reducing costs, which could lead to earnings continuing to grow faster than sales.
One analyst with Guggenheim just recently called Best Buy "one of the most undervalued stories in large cap retail." Given the recent strong results and growth catalysts, it's easy to see why. The stock currently trades at a forward P/E of 12.2 and offers a dividend yield of 2.78%.
