This Just In: Upgrades and Downgrades – Best Buy Co., Inc. (BBY), Costco Wholesale Corporation (COST)

Page 1 of 2

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and “initiating coverage at neutral.” Today, we’ll show you whether those bigwigs actually know what they’re talking about. To help, we’ve enlisted Motley Fool CAPS to track the long-term performance of Wall Street’s best and worst.

Goldman Sachs thinks Best Buy really is… a great buy right now
As a hyperinflated stock market treads water today, shareholders in one retailer, at least, are still flying high. Why? Perhaps inspired by the furor surrounding Dell Inc. (NASDAQ:DELL)‘s going-private drama, investment banker Goldman Sachs announced it was reinitiating coverage of Best Buy Co., Inc. (NYSE:BBY) as well.

Best Buy Co., Inc. (NYSE:BBY)Like Dell, you see, Best Buy remains a potential takeout target. I recently argued that even after getting a buyout bid, Dell shares look cheap at nine times earnings and a 9% growth rate could produce further profit if the buyout fails to go through or better bids emerge. Goldman seems to see similar upside in Best Buy Co., Inc. (NYSE:BBY) today — with or without a buyout offer from founder Richard Schulze.

According to the analyst, Best Buy’s in the midst of a move to cut costs and improve profitability. Although “Q1 results are unlikely to inspire,” Goldman thinks that “ over time costs are likely to track below Street consensus.” As a result, earnings should be above Street consensus. Goldman also points out that the stock’s valuation is “at the low end” of the retail stocks it covers, suggesting there’s at least an “opportunity for outperformance.”

Is that correct?

Running the numbers
It depends on how you look at the numbers. On the one hand, Best Buy Co., Inc. (NYSE:BBY) currently sports a negative P/E ratio, based on trailing-12-month results. On the other hand, the stock costs only 9.1 times the earnings it’s expected to produce next fiscal year. Meanwhile, on the third hand (the third hand?), the company’s already generating substantial free cash flow from its business — $680 million annually at last count.

Now compare these numbers to Best Buy’s fiercest competitors. Amazon.com, Inc. (NASDAQ:AMZN), which heads the list, is also currently unprofitable. What’s more, its forward P/E ratio of 75 is vastly more expensive than Best Buy’s single-digit forward P/E.

Costco Wholesale Corporation (NASDAQ:COST), too, costs more than Best Buy on a forward earnings basis (20x earnings), albeit it’s already profitable today and probably deserves points for consistency. Wal-Mart Stores, Inc. (NYSE:WMT) is even cheaper, costing less than 15 times today’s profits and about 12.6 times next year’s. So to an extent, yes , Goldman’s right that Best Buy’s valuation looks low. Then again, this low valuation may be deserved.

Considering the options
After all, when shopping for electronics goods — Best Buy’s forte — what are consumers’ options, really? As it stands, electronics retailing basically breaks down among four choices, depending on what you’re looking for:

If you want in-person service and installation, you go to Best Buy and its Geek Squad.

If you just want a cheap price, you go to Walmart.

If you want a cheap price and don’t want to pay sales tax, you log on to Amazon.com. (At least, you do unless you live in Arizona, California, Kansas, Kentucky, New York, North Dakota, Pennsylvania, Texas, or Washington (and the list is only getting longer).

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!