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Here's Why Best Buy Stock Is Going Back Up

By Jon Quast – Apr 17, 2020 at 8:03AM

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Even with its stores operating only as pickup locations for its e-commerce business, the electronics retailer has been on consumers' minds.

In just under a month, shares of Best Buy (BBY 0.31%) have risen nearly 29% as of this writing. That was a fast rebound from the more than 40% decline shares experienced earlier this year as the reality of the COVID-19 pandemic set in on Wall Street. But even after the partial recovery, shares are down over 25% year to date.

Still, investors understandably want to know why Best Buy stock has been recovering lately, and even more importantly, they want to know whether the company is a good investment going forward.

A hand draws a rising stock chart.

Best Buy's stock has recovered from lows. Image source: Getty Images.

What's driving the rebound?

Certain stocks have done quite well in 2020 -- think supermarket chains and other retailers that provide essential goods. Investors are turning to these "safe havens" as consumers pack their pantries in anticipation of extended stay-at-home orders. On March 21, Best Buy told investors that it too is seeing increased demand for its products.

For the eight-day stretch that started on March 13 -- the day President Trump declared a national emergency -- Best Buy's sales increased 25% year over year. Millions of people joining the remote workforce suddenly needed computers and other office supplies to stay productive, and other consumers prepared for the pandemic by buying freezers -- and video games.

The spike in demand for these products makes sense. A recent Gallup poll shows that 57% of the U.S. workforce is doing at least some work from home, and most states have stay-at-home orders in place. Best Buy was one of the retailers best positioned to fulfill many people's key pandemic-driven needs. As a result, sales in the 9-week period ended April 4 were down just 5% year over year, and the company is still managing to capture approximately 70% of its revenue even though stores are closed to regular traffic.

Best Buy was also one of the more financially healthy consumer-discretionary retailers prior to the coronavirus shutdown. It had $2.23 billion in cash and equivalents and $1.23 billion of debt on its balance sheet at the beginning of February. As a precaution, on March 19, Best Buy upped its liquidity by withdrawing an additional $1.25 billion from its credit facility, and it has suspended share buybacks.  

Add all these factors up, and investors should not be surprised to see Best Buy stock recovering from its recent lows.

Right now

To be clear, despite the retailer's relative strength, revenue has plummeted 30% year over year in the period from March 21 through April 11. That's when Best Buy closed its stores to customers and shifted to a strict buy-online and pick-up-curbside model.

The company is now making other hard choices. It's furloughing 51,000 hourly workers starting April 19, while CEO Corie Barry takes a 50% pay cut, and other managers see their salaries reduced 20%. Best Buy will also be "reducing promotional and marketing spend" and "lowering capital spend to focus on mandatory maintenance or high-value strategic areas."

The retailer's story is a good reminder that investors need to be discerning when they attempt to assess how COVID-19 will impact any given company. In some cases, the coronavirus is driving the faster adoption of certain technologies and services. Businesses that are supplying that demand have a silver lining to look forward to in the midst of this pandemic.

So is it a good investment?

Notably not being furloughed right now are most of Best Buy's Geek Squad agents. That speaks to the strategy that allowed the traditional brick-and-mortar retailer to distinguish itself and thrive in the age of e-commerce. Through things like the Geek Squad, the business has continued to meet evolving consumer needs and produce strong results. Revenue rose 1.8% in fiscal 2020 to $43.64 billion, while net income increased 5.3% to $1.54 billion.

Prior to the outbreak, Best Buy had set a long-term revenue target of $50 billion for fiscal 2025, which would have required a compound annual growth rate of less than 4%. That was management's optimistic outlook, so needless to say, this isn't going to be a high-growth stock. However, there's no reason to believe it can't continue to post consistent growth as it has done in the past.

And while share buybacks are temporarily finished, Best Buy is still paying its dividend. The company has paid quarterly dividends since 2004 and has raised its payout over five consecutive years -- the stock yields 3.2% as of this writing. In addition, its payout ratio was low at 34% in its latest fiscal year, which makes me optimistic that it will continue to pay dividends even as its revenue and cash flow comes under pressure in the coming months.

In that context, Best Buy makes for an attractive investment with shares still down significantly from their recent highs.

Jon Quast has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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