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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Best Buy

April 8th 2011 Best Buy
NYSE Symbol: BBY
Industry: Electronics
Price as of 4/8: $29.70

The major averages ended the first quarter on a high note with a 6% gain. This week the averages were quiet ahead of the start of the earnings season which begins next week. It's always tough to recommended stocks ahead of the earnings season. Typically, it's best to wait to buy stocks following earnings even if the prices are higher. This week we will feature a blue chip electronic retailer that reported strong earnings, but disappointed Wall Street with their guidance. The stock of the week is Minneapolis based, Best Buy. Best Buy continues to make a lot of money, but investors are concerned about the trend as competitors have turned flat screens into a commodity. Good for consumers, but bad for retailers. However, Best Buy's demise is greatly exaggerated. Going forward, Best Buy will continue to make a lot of money and focus on more profitable products to ensure earnings remain strong. In the short term, Best Buy may remain under pressure, but long term the stock remains attractive.

Weak demand for pricey flat-screen TVs and notebook computers helped push the largest U.S. electronics chain retailer's fourth-quarter net income down 16% year over year, although it did beat estimates. Fourth-quarter net income fell to $651 million, or $1.62 per share, from $779 million, or $1.82 per share last year. Best Buy has been restructuring its international operations, particularly in China, as well as cutting costs in its U.S. supply chain. Excluding costs for those moves, net income totaled $1.98 per share which beat the analyst estimates of a $1.84. Revenue edged down 2% to $16.26 billion. U.S. revenue fell 4% to $12.1 billion, while international revenue rose 4% to $4.1 billion. For the year, net income fell 3% to $1.28 billion, or $3.08 per share, from $1.32 billion, or $3.10 per share last year. Revenue rose 1% to $50.27 billion.

Best Buy is contending with declining sales in a changing electronics market where more people are buying online or in discount stores such as Wal-Mart. As more consumers do research online, they no longer need to traipse to a big-box store to see all of the latest TV models, eliminating a key advantage for Best Buy. In addition, new TV technologies, such as 3-D and Internet-enabled TVs, have failed to capture Americans' imagination the way smart phones and tablets have like the Apple iPad. To combat this, Best Buy says it is focusing on profitable areas where it has a relatively small share of the market, expanding selections of mobile phones, video games, appliances, e-readers and tablet computers. The decline adds urgency to the electronics retailer's bid to remake its business by opening smaller stores and focusing on more profitable, fast-growing categories such as tablet computers and smart phones. It has shrunk space dedicated to less popular products. For example, its cut space for compact discs in half last year. Best Buy is changing its TV-selling strategy by significantly increasing TV selection online, offering 100 models in stores but 300 more online only at more competitive prices. The chain is also pushing hard to open smaller stores. The company is opening 150 smaller-format mobile only stores by the end of the year, nearly doubling its total to 325. The president of the Americas unit indicated Best Buy doesn't plan to compete on price alone, but offer a variety of deals on financing, buy-back programs and services and other promotions that will vary by product category.

Looking forward, Best Buy expects earnings of $3.30 to $3.55 per share, excluding costs related to restructuring its international operations and cutting costs in its U.S. supply chain. Analysts expect $3.56 per share. Revenue is projected around $51 billion to $52.5 billion. Analysts expect $52.1 billion.

Worries about its ability to deal with tanking TV sales combined with a muted outlook for fiscal 2012 sent the stock tumbling to a 2 year low. But even though Best Buy lowered guidance, the stock seems to have been overly punished. Currently even with the reduced estimates, Best Buy is trading for 8.6 times earnings, 8.1 times next years' earnings, 0.23 times sales, and 1.6 times book value of $18.50 a share. The company has only $1.7 billion in debt and $1.12 billion in cash. With the recent weakness in the stock, the dividend yield is now 2% and goes ex-dividend next week on the 12th. The spring and summer time are typically not strong quarters for Best Buy, but at its' current level, the stock provides an attractive valuation for long term investors.