BBY Rockets Upwards. But Is There Reason to Worry?

Shares of Best Buy Co. (BBY) jumped 0.3 % during today's morning session, bringing their 52 week performance to -28.2%. The stock seems to be undervalued in terms of traditional metrics, but in this day in age, we believe that a complete stock analysis should also take into account growth metrics and market sentiment -- which can shed light on the stock's long term and short term prospects respectively.

Best Buy Co., Inc. retails technology products in the United States and Canada. The large-cap Consumer Cyclical company is based in Richfield, United States and has 57,750 full time employees.

BBY's P/E Ratio Is Better Than the Sector Average

Compared to the Consumer Cyclical sector's average of 24.11, Best Buy Co. has a trailing twelve month price to earnings (P/E) ratio of 11.1 and an expected P/E ratio of 12.0. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $7.47 and $6.91 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since Best Buy Co.'s P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

BBY Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since Best Buy Co.'s P/B ratio of 6.2 is higher than its sector average of 3.11, such a margin of safety does not exist for the stock.

Investors Stand to Gain from BBY's Cash Flows

Best Buy Co. has strong cash flows. With a coefficient of variability of 46.8% and an average growth rate of 35.2%, the company is effectively turning its revenue into cash. We calculate Best Buy Co.'s free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a -3.3% rate, versus 21.5% for operating expenses:

Date Reported Cash Flow from Operations ($) Capital expenditures ($) Free Cash Flow ($) YoY Growth (%)
2022-01-29 3,252,000,000.0 -737,000,000.0 2,515,000,000.0 -40.32
2021-01-30 4,927,000,000.0 -713,000,000.0 4,214,000,000.0 131.28
2020-02-01 2,565,000,000.0 -743,000,000.0 1,822,000,000.0 14.66
2019-02-02 2,408,000,000.0 -819,000,000.0 1,589,000,000.0 n/a

Best Buy Co.'s Margins Are Strong

If you buy a stock for the long run, you want the underlying business model to be profitable. Gross margins tell you how much profit the company generates compared to the cost of revenue, which is the cost directly related to providing Best Buy Co.'s goods and services. Operating margins, on the other hand, tell you how much of these profits the company keeps after you take overhead into account.

Best Buy Co.'s Gross Margins

Date Reported Revenue ($) Cost of Revenue ($) Gross Margins (%) YoY Growth (%)
2022-01-29 51,761,000,000.0 40,127,000,000.0 22.48 0.27
2021-01-30 47,262,000,000.0 36,666,000,000.0 22.42 -2.65
2020-02-01 43,638,000,000.0 33,590,000,000.0 23.03 -0.86
2019-02-02 42,879,000,000.0 32,918,000,000.0 23.23 n/a

Best Buy Co.'s Operating Margins

Date Reported Total Revenue ($) Operating Expenses ($) Operating Margins (%) YoY Growth (%)
2022-01-29 51,761,000,000.0 48,751,000,000.0 5.82 6.4
2021-01-30 47,262,000,000.0 44,675,000,000.0 5.47 16.38
2020-02-01 43,638,000,000.0 41,585,000,000.0 4.7 2.84
2019-02-02 42,879,000,000.0 40,920,000,000.0 4.57 n/a

Best Buy Co.'s cost of revenue is growing at a rate of 10.8% in contrast to 6.1% for operating expenses. Sales revenues, on the other hand, have experienced a 6.5% growth rate. As a result, the average gross margins growth is -1.1 and the average operating margins growth rate is 8.5, with coefficients of variability of 1.8% and 11.7% respectively.

We See Mixed Market Signals Regarding BBY

Best Buy Co. has an average rating of hold and target prices ranging from $110 to $59. At its current price of $82.63, the company is trading 1.39% away from its target price of $81.5. 4.1% of the company's shares are linked to short positions, and 81.3% of the shares are owned by institutional investors.

In conclusion, we see that Best Buy Co. shares are undervalued with mixed growth indicators and mixed market sentiment.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.