In a move that marks a temporary respite from the downward pressure facing the consumer-electronics superstores this holiday season, Credit Suisse upgraded shares of Best Buy (NYSE:BBY) Thursday morning to a "market outperform" rating.
As the analyst group's thinking goes, the stock has been beaten up too severely after last month's lackluster third-quarter report. A few weeks later, CircuitCity (NYSE:CC) also spooked investors with a bland showing as it talked down its earnings prospects.
Even though smaller players such as Tweeter (NASDAQ:TWTR) had been faltering for some time now, Best Buy and Circuit City had been in a league of their own, until they, too, got knocked down.
It's way too easy to dismiss the two big-box bellwethers' downturn as a temporary blip. So let's look at some key moves from other retailers.
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Home Depot (NYSE:HD) is devoting rack space to home theater systems this holiday season.
- Last month, Wal-Mart rolled back prices on 100 different items in its consumer electronics department.
- Amazon.com (NASDAQ:AMZN) is spoiling its Prime membership customers with free two-day delivery on electronics.
Simply put, someone has moved Best Buy's cheese. Investors who were left scratching their heads as to why Best Buy could achieve only 8.7% bottom line growth on a 15.5% uptick in sales now have to deal with the reality that price-cutting discount department stores and the emergence of non-traditional electronics retailers in this niche -- including an orange-apron-donning hardware chain -- will pressure margins. Markups will be kept honest.
Yes, Best Buy can grow in this kind of environment. However, analysts have been talking down the rate of that growth. Over the past month, Wall Street has gone from expecting Best Buy to earn $3.23 a share in the upcoming fiscal year to deciding it will hit $3.16. That may not seem like much of a difference, but it is. It's the difference between growing earnings per share at a 17% clip and what is now just a 14% rate. More importantly, if the margin pressures continue the way they did this past quarter, even 14% growth may prove to be optimistic.
Naturally, the Credit Suisse analyst has consumed all of that information -- and then some -- in arriving at the conclusion that Best Buy is due to bounce back. As a gadget geek, I'll admit to occasionally forcing myself not to veer off the road when I pass a Best Buy. However, Best Buy is going to need a lot more people like me, willing to pay more, to earn the market's nod in the future.
Let's just hope that the next time the ice cream truck comes around playing "Camptown Races" on its tinny speakers, the driver isn't also selling iPod shuffles, GPS systems, and Wii games.
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Longtime Fool contributor Rick Munarriz is a kid at heart. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
