Is Best Buy Co., Inc. (BBY) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Best Buy Co., Inc. (NYSE:BBY) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for

The graphs you’re about to see tell Best Buy Co., Inc. (NYSE:BBY)’s story, and we’ll be grading the quality of that story in several ways:

1). Growth: Are profits, margins, and free cash flow all increasing?
2). Valuation
: Is share price growing in line with earnings per share?
3). Opportunities
: Is return on equity increasing while debt to equity declines?
4). Dividends
: Are dividends consistently growing in a sustainable way?

What the numbers tell you

Now, let’s take a look at Best Buy Co., Inc. (NYSE:BBY)’s key statistics:

BBY Total Return Price Chart

BBY Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 1.1% Fail
Improving profit margin (118.3%) Fail
Free cash flow growth > Net income growth (64.6%) vs. (237.8%) Pass
Improving EPS (249.8%) Fail
Stock growth (+ 15%) < EPS growth (18.8%) vs. (249.8%) Fail

Source: YCharts and Morningstar.

* Period begins at end of Q1 (Feb.) 2010, adjusted to April 2013 end.

BBY Return on Equity Chart

BBY Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity (126%) Fail
Declining debt to equity 102.8% Fail
Dividend growth > 25% 21.4% Fail
Free cash flow payout ratio < 50% 107.2% Fail

Source: YCharts. * Period begins at end of Q1 (Feb.) 2010, adjusted to April 2013 end.

How we got here, and where we’re going

Things don’t look good for Best Buy Co., Inc. (NYSE:BBY) today. The electronics retailer earns only one out of nine possible passing grades, and even that lone pass was granted more on a technicality than on a genuine improvement. Despite this weakness, Best Buy’s shares have staged an impressive comeback over the past few months, nearly returning to even after a wretched multiyear decline. Is this rebound sustainable, or will Best Buy’s fundamental weaknesses catch up to it in the end?

Most of our Foolish commentators certainly don’t think so. Longtime contributor Rick Munarriz makes light of Best Buy Co., Inc. (NYSE:BBY)’s latest differentiation effort — placing hundreds of Microsoft Corporation (NASDAQ:MSFT) stores-within-stores across its franchise — by pointing out that the same failed tactic recently got Ron Johnson ousted from the corner office at J.C. Penney Company, Inc. (NYSE:JCP). It’s worth pointing out that a department store is not an electronics store, and J.C. Penney Company, Inc. (NYSE:JCP) faces more diverse direct competition than Best Buy. On the other hand, it’s not like Microsoft Corporation (NASDAQ:MSFT)’s new tablets and smartphones were must-have gadgets for the shopping populace. Are people really more likely to visit a Best Buy just to look at Windows 8?

It’s also worth pointing out that both Apple Inc. (NASDAQ:AAPL) and Samsung already have stores-within-stores in Best Buys. Fool contributor Anders Bylund calls the Microsoft addition the equivalent of “building a high-tech flea market,” which is a great metaphor, and one I happen to agree with.

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