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Best Buy
(BBY) stock has been anything but a good buy in 2023—but its earnings report on Tuesday could mark a turning point for the shares.
Shares of Best Buy have fallen 7.7% so far this year, worse than the SPDR S&P Retail exchange-traded fund (XRT), which has gained 2.8%, and the
S&P 500,
which is up 15%. There’s a good reason for that. Analysts have reduced their 2023 earnings estimates for the retailer by about 12% in the past six months, according to FactSet, more than the consumer-discretionary sector’s 10% drop. The problem is the electronics that Best Buy sells. Following a Covid-era boom, manufacturers and retailers alike had too much inventory, which caused prices and the number of items sold to decline, squeezing profit margins and the bottom line.
Expecting earnings season to help Best Buy might seem quixotic. Strong reports haven’t done much for consumer stocks this quarter, with companies in the sector beating estimates by 22%, as of Aug. 18, according to Credit Suisse, but the retail ETF falling 9% from a late July peak. Worse yet, even companies that have topped forecasts are offering lukewarm guidance due to consumer pressures, causing shares to drop. That was the case with
Macy’s
(M), which fell 14% after reporting on Tuesday, and
Dick’s Sporting Goods
(DKS), which tumbled 24% on Tuesday.
Best Buy, though, might be ready to zig when everyone else zags. Estimates call for sales to rise to $9.52 billion during the second quarter, up from the first quarter’s $9.45 billion, and earnings of $1.06, down from $1.15. Those numbers, though, should be beatable, says Wedbush analyst Seth Basham. “We lean positive on Best Buy into second-quarter 2023 earnings,” he writes. “We see potential for modest upside to sales and margins for the second quarter and with a second consecutive quarterly beat, Best Buy may be compelled to bump up its fiscal-year 2023 guidance, despite an uncertain macro outlook.”
An earnings beat wouldn’t be all that unusual for Best Buy. It has surpassed forecasts in six of the past seven quarters, according to FactSet, and has gained on the trading day after earnings in six of those quarters. That’s partly because it’s a cheap stock. Shares trades at about 11.3 times 12-month forward estimates, below its own five-year average of 12.4 times. It also trades at a 39% discount to the S&P 500’s 18.6 times, though it has traded at a 20% discount when the market was confident in its outlook. That could ultimately lead the stock to trade at 14 times, up 24% from Thursday’s close.
If the earnings and guidance are solid, this stock could be one of the best buys in the market over the next week.
Write to Jacob Sonenshine at [email protected]
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