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

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
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 World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!