Best Buy Executes Well, but Shares Overpriced
While we see the attraction in the retailer's shareholder-return story, the market continues to price in top-line growth and margins that seem like a stretch even for one of the most improved retailers.
Despite the strong quarter and reasonable expectations for fiscal 2019 (revenue between $41 billion and $42 billion, 0%-2% comps, operating margins of 4.5%--flat versus fiscal 2018--and adjusted EPS of $4.80-$5), we still see a disconnect between the stock's valuation and our longer-term assumptions. We plan a moderate increase in our $48 fair value estimate based on current trends and time value of money, but still see 0%-1% comps and operating margins peaking around 5% before contracting amid industry consolidation/competitive pressures across new products and in-home services (the rationale behind our no-moat rating). While we see the attraction to Best Buy's shareholder-return story (including a 32% increase in its annual dividend to $1.80 and $1.5 billion in buybacks planned this year), we believe the market continues to price in low- to mid-single-digit top-line growth and 6% margins over an extended period, which seems like a stretch even for one of the most improved retailers./p>
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