Best Buy – the RIMM of retail

When Best Buy reports earnings before the bell on Tuesday morning, there may not be a whole lot of folks interested in the report, given the stock is now trading under $20 per share, and is thought to have a major structural cost problem.

However, although we dont own any shares for clients presently, the cash-flow metrics of BBY remain intriguing if the company can find a CEO that can pull it out of its current malaise.

There is a lot of bad news in the stock, i.e. the Brian Dunn scandal, which has left the company temporarily without a CEO, the announcement of the closing of 50 stores, which is about 5% of BBY’s square footage, the lowered 2013 guidance (can we stop now ?) and the list goes on, and yet the stock is just under $20 per share.

The valuation metrics of BBY seem compelling:

* 0.15(x) enterprise value to 4-quarter trailing sales;

* the stock is trading at 2(x) enterprise value to 4-quarter trailing cash-flow

* The stock is trading at 3(x) enterprise value to 4-quarter trailing free-cash-flow;

* With its current $7 bl market cap, BBY has a whopping 35% free-cash-flow yield or $2.5 billion of 4-quarter trailing free-cash-flow;

* The stock is trading at 6(x) expected fiscal 2013 earnings, which are expected to be flat on the year;

One major red flag would be a major reduction or elimination of the dividend, which is currently $0.16 per share per quarter, and was boosted from $0.15 late in 2011.

We are watching the stock and will see how the numbers fall out tomorrow. The stock will undoubtedly get a pop when the new CEO is named, which better happen by the end of the summer. Frankly i thought Brian Dunn’s strategy had merit, by trying to make BBY an aggregator of cell phone and iPad technologies. One stop shopping in a sense for various products around a core technology. However, the competitive threat by online commerce given BBY’s product mix, may be too difficult to overcome.

No BBY, long a little Amazon

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