2023.06.13
The american Best Buy is a multinational retailer which sells different electronical devices. It operates in the USA and in Canada as it had withdrawn from Europe, China and Mexico already. Founded in 1966, Best Buy distributes several brands and it is considered as the largest electronics store network in North America. The company reaches costumers via its subsidiaries, online purchase channels and bank payment applications, platforms.
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| Revenue | 42879 | 43638 | 47262 | 51761 | 46298 |
| ROE | 44,28% | 44,29% | 39,20% | 81,26% | 50,77% |
| EBITDA (m USD) | 2670 | 2821 | 3230 | 3908 | 2713 |
| EBITDA margin% | 6,23% | 6,46% | 6,83% | 7,55% | 5,86% |
| Dividend (USD) | 2 | 2,2 | 2,8 | 3,52 | 3,68 |
| Dividend yield % | 3,09% | 2,20% | 2,75% | 4,32% | 4,89% |
The company closes its financial year in every March, so we are calculating with the 2023 results as well.
Regarding the last five years, Best Buy is a stable company doing 45-50 billion USD revenue on yearly basis. It has a robust, constantly rising revenue from 2019 to 2023. Its EBITDA is also steady, it comes out to 6,5-7,5% of the revenue, this will presumably not change in the coming years.
The company's return of equity ratio is huge, reaching 44-50%. It operates with a high return of equity on a mature market.
Its dividend yield has been increasing from year to year for the last 12 years, close to 5% (considering current market price of equity of 75,24 USD). In comparison to an average yield of a 10-year state bond it provides a higher yield up to cca.1,5%.
As the company's D/E rate is growing gradually and its divident/FCFE rate stays below 80%, so we are going to use FCFF analysis.
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| D/E | 2,98 | 3,48 | 3,16 | 4,80 | 4,65 |
| Div/FCFE | 0,34 | 0,32 | 0,20 | 0,38 | 1,23 |
Our calculation is based on the yield of an american 10-year state bond (3,79%) as a risk free return and the average equity risk premium (4,4%) in the US market during the last 80 years. The company's cost of debt comes from its AAA rating.
Using these data we get 7,53% of WACC. We expect that the company's EBIT is going to decline by 2,7% and will creep back to 2% after the 5th year. The return of invested capital is 9,99%.
As the earning before interest and taxes had been increasing up to 2023 but started to decline right after, so did FCFF values. Getting the FCFF figures and discounting with the weighted average cost of capital (WACC) we get finally the value of the company. It is now $22.821,5 billions USD which means 103,03 USD per share calculating with 221,5 millions shares outstanding. Considering a margin of, our target price is 68 USD.
| 2019 | 2020 | 2021 | 2022 | 2023 | 2024E | 2025E | 2026E | 2027E | 2028E | TV | DCFV | V | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EBIT (1 - t) | 1506,82 | 1593,27 | 1896,22 | 2410,12 | 1423,55 | 2164,76 | 2104,45 | 2045,8 | 1988,82 | 1933,414 | |||
| FCFF | 1800,17 | 1903,44 | 2265,37 | 2879,32 | 1700,68 | 2586,2 | 2514,14 | 2444,1 | 2376 | 2309,8 | 1696,5 | ||
| DCF | 2404,97 | 2174,15 | 1965,5 | 1776,84 | 1606,3 | 21315,3 | 31243,9 | 22821,5 |
At the time of the analysis the share price is 75,24 USD and this is very close to our proposed price! According to our calculation, the current price is 27% lower than the intrinsic value (103,03 USD vs 75,24 USD) and this 27% discount meets almost the value of our margin of safety, resulting in a quite conservative share pricing. We recommend to buy shares at this price.
| 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|
| ROIC | 15,20% | 14,50% | 14,45% | 18,01% | 10,00% |
| D/E | 2,98 | 3,48 | 3,15 | 4,79 | 4,65 |
| P/BV | 5,8 | 8,06 | 5,93 | 7,08 | 5,62 |
| Dividend | 2 | 2,2 | 2,8 | 3,52 | 3,68 |
| Dividend payout ratio% (DIV/FCFE) | 0,343 | 0,323 | 0,196 | 0,385 | 1,229 |
| FCFE/shares outst | 5,82 | 6,8 | 14,27 | 9,15 | 2,99 |
| Cash to stockholders to FCFE | 1,37 | 1,033 | 0,33 | 0,88 | 4,175 |
The return of invested capital is 10-15% a year, this is much higher than the WACC (7,53%) meaning that the company is value generator. The ROIC is higher than the cost of capital by 3%-7% annually. The D/E ratio has been increasing and this is not a good sign. The leverage has been growing and although it is not extreme yet, this level above 4,5 might be risky. The price-to-book ratio is quite high, stable and it is around 5-7. Just like at the D/E rate, we consider this level risky; the company needs more capital as despite of its present good results, insufficient capital can be restrictive on a long term.
The company is increasing its dividend year by year, this trend has started 12 years ago.
The FCFE covers an increasing dividend payout till last year where we’ve got higher ratio (1,229). In case FCFE goes up to its former level, the dividend payout rate will not cause any problem.
From 2018 to 2021 the company paid out a lower dividend than it could have but this changed in the last year because of the lower FCFE figure. Instead of paying out 5-8 USD as dividend, they decided to hold it back the majority of this result for further investment. Therefore in 2023 a part of the payout will be made from this retained profit.
The cash to stockholders to FCFE ratio shows the propotion the company pays back to share holders as dividend and buying own shares. In the last 4 years this was the 86% of its annual FCFE in average. This value in 2022 is not relevant and we hope that it will follow the trend.
According to current share prices and other data:
| Stock | Price | Sh outs | NI | P/E | BV | P/BV | Revenue | P/Sales | Ebitda | EV/Ebitda |
|---|---|---|---|---|---|---|---|---|---|---|
| Target | 126,99 | 460,9 | 2780 | 21,05 | 11232 | 5,21 | 109120 | 0,54 | 6614 | 8,85 |
| Walmart | 153,09 | 2690,0 | 11680 | 35,26 | 76693 | 5,37 | 611289 | 0,67 | 35473 | 11,61 |
| Costco | 517,28 | 443,8 | 5844 | 39,28 | 20642 | 11,12 | 226956 | 1,01 | 10070 | 22,80 |
| Lowe's | 209,12 | 596,0 | 6416 | 19,43 | -14254 | -8,74 | 97059 | 1,28 | 15171 | 8,22 |
| Amazon | 123,43 | 10250,0 | -2722 | -464,79 | 146043 | 8,66 | 513983 | 2,46 | 39039 | 32,41 |
| BBY | 75,24 | 221,50 | 1419 | 11,74 | 2795 | 5,96 | 34229 | 0,49 | 2713 | 6,14 |
| átlag | 28,76 | 7,59 | 1,19 | 16,78 | ||||||
| Pe= | 184,21 | 95,79 | 184,42 | 205,47 |
Regarding all indexes, the company is considered a strong buy compared to its competitors, because - based on the relative analysis - it is cheaper then its peers. The relative analysis shows that theoretical values of Best Buy shares should have been between 184 and 205 USD except for its price-to-book ratio which is now 96 USD. This is 27% higher than the current price which means that the company is undervalued compared to its competitors.
*Companies with significantly low revenues (Net Income – Amazon, Book value – Lowe’s) were removed from our analysis in order to avoid their distorting effects on a 5 components competitor average. Therefore our calculation in this cases are restricted to 4 elements.
According to our calculations, Best Buy has a stable revenue and an outstanding return of equity (above 40%). Its EBITDA margin is steady (6-7%). The company has paid out increasing dividends for the last 12 years however this trend stopped in 2023 due to lower FCFE.
Our only concern is that the company's leverage is above 5, this could be a threat on longer term.
According to the relative valuation and its financial results, Best Buy is a steady, reliable company. In spite of the low FCFE value of last year, we do not expect any further decline in its profit.
According to FCFF analysis, the fair price is 103,3 USD / share. Using a margin of safety, our target price is 68 USD. This price is supported by the competitor analysis, the company is undervalued compared to its competitors.
This price meets almost the calculated price with our margin of safety, so our proposal is: buy
