Best Buy's stock is still a good buy

By Robert Walberg

Best Buy’s (BBY, news, msgs) latest earnings report goes a long way to dispel concern about a consumer-led economic slowdown.

The nation’s largest electronics retailer said Tuesday that quarterly profit rose 22% on a 13% jump in sales. Many retailers are struggling for growth amid higher energy prices, rising interest rates and declining home values. Yet Best Buy’s success selling flat-panel TV sets and other products shows that consumers may continue to spend.

Best Buy’s stock is also a good investment, even after a 10% bounce since the earnings news. Don’t be surprised if the company keeps beating expectations.

Beating the competition

The retailer continues to steal share in the competitive consumer electronics market, which is crowded with the rejuvenated Circuit City (CC, news, msgs) and big box discounters such as Wal-Mart (WMT, news, msgs), Costco (COST, news, msgs) and Target (TGT, news, msgs).

Best Buy’s “Geek Squad” technical service already provides extra assistance to consumers. Now the company plans to expand its reach to small businesses with its “Best Buy for Business” program, which is expected to appear in an additional 100 stores by year end. It also has specialized departments to help set it apart. It has 162 Magnolia home-theater stores-within-a-store and plans to open another 200.

One segment that struggled last quarter was appliances, which isn’t a big surprise given the slowdown in the housing market. Best Buy is educating its sales staff and creating stores-within-a-store to help set it apart from rivals such as Home Depot (HD, news, msgs), Lowe's (LOW, news, msgs) and Sears (SHLD, news, msgs). Based on the success of the same formula for electronics, don’t be surprised to see Best Buy build its share in the appliance market.

Some concerns dog the stock

Some concerns remain. Analysts were troubled by relatively slow same-store sales growth (3.7%, versus the consensus estimate of 4.1%) and a 0.5% drop in gross margins. The company drove sales with discounts during a traditionally slow season. But that’s no reason for alarm because there’s no sign of a long-term pattern or change in management direction.

Other analysts worried about the company’s refusal to boost its full-year earnings forecast. Yet prudence dictates caution. Consumers showed appetite for electronics last quarter, but that doesn’t mean that higher interest rates or depressed real estate values will never pinch demand. It’s better to deliver a positive surprise than to promise the moon and come up short. Best Buy’s management is too savvy to make such a mistake.

The only concern worth worrying about comes from a surprising source -- Apple Computer (AAPL, news, msgs). Apple’s new iTV will let consumers download movies and TV shows and then play them over their TVs. Downloads will range from $9.99 to $14.99, well below the typical cost of $17.99 or more for new DVDs.

Apple is a threat

While such products haven’t succeeded in the past, Apple’s huge success in the music business makes it a serious threat to the DVD business. Indeed, discounting in the DVD business was one reason Best Buy’s margins slipped. If Apple gains traction with its new iTV it could mean trouble for DVDs.

Aside from this concern, the outlook for Best Buy looks bright. Consumer demand for flat-panel televisions, computers and satellite radio systems should remain strong for the holidays. Also, the company should benefit from the launch of Sony’s Playstation and Nintendo’s Wie game system, and from the eventual release of Microsoft’s (MSFT, news, msgs) new operating system. (Microsoft is the publisher of MSN Money.)

At the current price of $52, Best Buy trades at roughly 18.5-times estimated earnings -- a level consistent with the industry despite the company’s history of superior execution. Growth-oriented investors should take advantage of a dip back to the $50 area in anticipation of an intermediate-term test of Best Buy’s 52-week high of $59.50. The stock will remain a component of my Street Patrol portfolio.

Robert Walberg is a financial writer based in Chicago, Ill. He was formerly chief equity analyst at Briefing.com. He is a regular guest on CNN's Moneyline. Mr. Walberg ran for Congress in Illinois in 1994.

At the time of publication, Robert Walberg did not own or control shares of any companies mentioned in this article.