Best Buy [$38.56] shares took a big hit [ - $2.61  -(6.36%) ] on disappointing May quarter earnings of $0.36 versus a $0.50 estimate and $0.42 in the year-ago period.

Trailing 12-month earnings are now $3.09 putting the P/E at 12.4x- the lowest since right after the market’s bottom in late 2008 -early 2009.

Analysts are busy reworking their estimates for the remainder of FY 2010 and beyond.

Previous expectations for Fy 2010 and FY 2011 were $3.60 and $3.85. It seems unit sales were ok but retail prices, especially on big screen TVs, had dropped faster than anticipated.

Since BBY typically commands about 14 - 15 times earnings the shares are likley to rebound even as estimates get reset to lower levels.

I’d consider selling some Jan. 2012 Puts at the $30 and $35 strikes.

As of today’s close…

Jan. 2012 $30 puts …………………. $4.20 /sh. ……………. $25.80 ‘if put’

Jan. 2012 $35 puts ………………….. $6.30 /sh. …………… $28.70 ‘if put’

Both these positions allow for quite a good margin of safety from the already beaten down price while giving you plenty of time for the headlines to recede.

Best Buy [NYSE:BBY - $35.59] is the largest consumer electronics retailer in the U.S., with about 20% of the $170 billion market. With its 2009 acquisitions, the firm increased its share of the $700 billion global consumer electronics market to roughly 6%. Best Buy also operates under the Future Shop and Five Star trade names in Canada and China. They operate over 2400 Best Buy Europe stores as well as Magnolia Home Theater, Pacific Sales Kitchen and Bath, and Geek Squad here in the U.S.

The bankruptcy of rival Circuit City has allowed Best buy to increase its already market-leading  share of the US space. FY 2010 [ends Feb. 28, 2010] will show the highest revenues ever at an estimated $49 billion. December 2009 sales were up 13% year-over-year.

Here are BBY’s impressive (split-adjusted) per share numbers from continuing operations as reported by Value Line:

* FY 2010 includes consensus estimates for Q4

Zacks now sees FY 2011 coming in at $3.33 /share making BBY’s multiple about 11.5x trailing and 10.7x forward earnings estimates. That’s the lowest valuation for BBY since the lows of 2000 and 2002. Buyers of Best Buy at those times saw the shares rebound from $9.30 to $35.80 (from December 2000 to March 2002) and from $11.30 to $59.50 (from November 2002 to April of 2006).

Just a quick glance at the chart above will show that both sales and earnings have surged over the past decade while the P/E has compressed. BBY’s valuation has rarely been this compelling despite the fact that fundamentals are expected to be at all-time highs in the fiscal year starting March 1^st.

Dividends were initiated in calendar year 2003 and have been steadily increased to today’s $0.14 quarterly rate. At today’s close that provides a well-covered current yield of 1.57%.

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52-week range: $16.42 (Nov. 21, 2008) - $48.99 (Sep. 19, 2008)

Dividend = $0.14 quarterly = 1.49% current yield

 

Best Buy is the largest specialty retailer of consumer electronics in North America, with about 1,100 stores in the U.S. and Canada. The company sells video and audio equipment, computers, and home appliances. Best Buy operates electronics stores in Canada and China under the names Future Shop and Five Star, respectively, and specialty stores Magnolia Home Theater, Pacific Sales Kitchen and Bath, and Geek Squad in the U.S.

 

 

FY 2008 (ended Feb. 2009) marked the first year-over-year decline in EPS since 1996. Zacks’ FY 2010 - 2011 estimates now are running $2.90 and $3.19 following last year’s $2.88 /share (excluding a $0.48 non-recurring loss). The demise of major competitor, Circuit City, has led to what may be a permanent gain in BBY’s market share.

 

At today’s close of $37.59 Best Buy shares now trade for < 13.7x this year’s and 11.8x next FY’s estimates. Those are a bit lower than the typical historical multiples for BBY.

 

Here are the split-adjusted, per share numbers from continuing operations as reported by Value Line:

 

FY	Sales	C/F	EPS	Div.	B/V	Avg. P/E
2002	43.37	1.93	1.27	Nil	5.65	17.1x
2003	50.41	2.43	1.63	0.27	7.03	18.8x
2004	55.70	2.82	1.91	0.27	9.03	18.6x
2005	63.59	3.29	2.27	0.31	10.84	19.2x
2006	74.76	3.92	2.79	0.36	12.90	18.6x
2007	97.48	4.84	3.12	0.46	10.92	15.1x
2008	108.82	4.84	2.88	0.53	11.22	12.4x

 

Dividends were initiated in 2003 and have been increased in each of the past five years. The 1.49% current yield is competitive with today’s bank CD and short-term treasury rates. It looks very safe with about a 20% payout ratio.

 

Value Line is using a 16 multiple for their 3-5 year projections. Even 14x the current fiscal year estimate of $2.90 would bring these shares to a $40.60 target price by next spring. Standard and Poors has a 12-month goal of $41 while Morningstar sees ‘fair value’ as $52/share.

 

Is a $40 expectation a reasonable number? Best Buy shares have traded above that price during each calendar year since 2003. They exceeded $50 at their peaks in each year 2005-2006-2007 and 2008. They were above $42 in April this year. The yearly lows in 2006 and 2007 were $43.30 and $41.80.

 

A move from $37.59 to the low $40’s would be ok, but not exciting.

Here’s what I see as a better play than simply buying BBY shares.

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