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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.

Securities In This Article
Best Buy Co Inc
(BBY)

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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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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