Sunday, August 1, 2010

Best Buy

I am slightly torn on Best Buy at the moment.  The uncertainty of the future is the only thing that keeps me from going all in on this issue.  Best Buy is conservatively financed with long term debt equal to less than one year of earnings.  Earnings have increased or held steady every year for the past 10 with the exception of 2009 when very few companies increased earnings.  Even with 2009 the year to year increase in earnings over the past 10 years has averaged 14%.

Return on Equity over the past 10 years is 20.9% which is well over the level of 15% that I like to see.

The price/earnings ratio for Best Buy has gone from 30 to 12.  Any company with 14% earnings growth year to year that is selling at 12 times current earnings is almost a no brainer.

While earnings have continued to rise over the past 10 years the share price has been on quite a ride.  The current share price at just under 35 is the same as it was in 2000, 2002, and 2003.

If Best Buy continues to perform over the next 10 years as it has over the past 10 I would expect the share price be somewhere between 200 and 333 which would work out to a yearly rate of return of 19% - 26%. 

So the decision comes down to whether or not I believe Best Buy can continue it's earnings increase.  The sheer fact that Best Buy is still standing (and thriving) is a testament to itself.  When I look at consumer electronics as a whole I see the biggest threats to Best Buy to be the superstores such as Wal-Mart, Target (both stocks that I like) and the like.  Personally i do not see this as a huge threat.  Best Buy has prices that compare very favorably with these stores and their selection is far superior.  Unlike many of the rental video stores I don't see Best Buy becoming obsolete with the increase of internet based entertainment.  People will continue to need the equipment to enjoy this entertainment and where better to buy that equipment than from Best Buy.

Best Buy is the best positioned company to increase it's market share with the void left by the recent bankruptcy of Circuit City.  I also see room to grow as my home town with a population of 20,000 has a Wal-Mart and a Home Depot, but still no Best Buy.

Maybe new management takes over and decides to concentrate more floor space to PCs while America drifts closer and closer to Steve Jobs.  Apple decides to stop allowing Best Buy to sell it's computers while it continues to open Apple stores across the country and Best Buy slowly fades into oblivion.  In that case I am happy I hold shares in Apple, but otherwise I see Best Buy as an excellent buy now.

My thoughts as of 8/1/2010 are that Best Buy is an excellent buy at $35 and a good buy at $55.



New Format

I've been somewhat lazy in my musings on this particular blog so I'm changing things around.  For the foreseeable future I am going to be publishing posts on various companies as I contemplate stock purchases.  I plan to update the individual posts as my thoughts on them change.  The reason for this is to have a notebook of sorts to record my thoughts on why or why not to purchase a particular issue.  The reason to do this in blog form is that I will then have access to my thoughts at any place I may be.

Should I feel some strong desire to air my thoughts on our country's treatment finance or healthcare I will continue to do that as well.