Today I will focus on the consumer discretionary sector, specifically the electronic retailers. In a recessionary environment, consumers tighten their purse strings and curtail spending on non-essential items like eletronics, vacations, and other luxury items. It would seem that investing in the electronics sector would be a non-starter, right? Not necessarily. However it does mean that investors have to be more careful which stocks they buy and must due harder due diligence.
Better Buy Best Buy
Best Buy (BBY) is my favorite stock in the sector. It has a very astute management team and it is the best of its breed in the industry. Its big competitor for years, Circuit City, vanished into thin air as it couldn’t compete, allowing Best Buy to capture many of those profits.
Looking at the macro picture, the National Retail Federation said that holiday sales will rise by the biggest amount in four years. Sales will rise 2.3% versus only 0.4% last year and a 3.9% plunge in 2008. In another piece of good news, The International Council of Shopping Centers said that retailers’ sales at stores open at least a year will rise up to 3.5% this season, which is also the best in four years.
I mentioned the company has an excellent management team. There is plenty of evidence to support this. The company has invited representatives from many different cable and telecom firms to sign up customers for various service upgrades if they buy devices from the store that can benefit from more speed. I bought my iPhone there and I got a great deal on my service. Management expects sales of smartphones to fuel a terrfic holiday season.
Best Buy’s fiscal second-quarter was a smash hit. It came in with earnings per share of 60 cents versus the consensus of 42 cents. Management also raised full-year guidance by a dime to $3.55 to $3.70 per share. The quality of the earnings was great too as gross margins rose 130 basis points and operating margin increased 110 basis points. In another sign of management skill, the online business jumped 16% during the quarter.
The stock itself is still cheaply priced even after a nice rise following earnings. It is trading at only 12x current-year estimates of $3.58 per share. This is less than the industry average and the multiple of the market as a whole. Two analysts have raised their forecasts for the year over the past month. I think $50 a share over the next 8-12 months is a reasonable target given all of the positives I have mentioned.
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