Christmas came early for electronics retailer Best Buy (NYSE: BBY). Its largest competitor, Circuit City (NYSE: CC), waived the white flag of surrender by filing for bankruptcy. Free to operate as the single largest retailer for electronics, good times are surely here for BBY, right?
Not so fast, buster. The long-term benefits of a weakened competitive landscape are no doubt positive for BBY, but only if it manages to survive what most now believe will be a long and deep recession. This is not your ordinary recession. Businesses are failing and more are sure to follow. No firm, no matter its size or supposed strength, is immune, and all sectors are feeling the impact of deflation.
That deflation is bad news for companies that rely on the consumer for business. A sudden decline in spending can have significantly negative consequences. Employees, rent and other fixed costs must be paid no matter what is happening on the top line.You better hope your balance sheet can withstand multiple quarters of losses, because that is what is transpiring right before our very eyes.
Some may say the depressed stock market is acting in fear and irrationality, but I see it a bit differently. Investors may have been a bit slow to pick up on it, but the landscape became very clear in October. Earnings are dropping like a rock and, as such, stock prices must adjust to that bitter reality.
Company after company is reporting results accompanied by guidance for the future that reflects weakness. You can almost set your watch by the statement. They are quite regular and consistent with their pessimism.
The gist is that the economy hit a brick wall in October, and business has suddenly slowed. Some are going so far as to say this is the most difficult operating environment ever seen. Late Wednesday, BBY joined the chorus putting an end to the demise of CC. CEO Brad Anderson stated, "Rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." The company stated that it now expects earnings of $2.30 to $2.90 per share for the fiscal year ending in February 2009. This pales in comparison to the current Wall Street estimate of $3.25 to $3.40 per share.
Despite the news being nothing of a surprise, shares of BBY, already down more than 50% over the last year, were down nearly 10% on Thursday. If BBY hits the low end of the new earnings range, shares trade for less than 10 times that number. The problem, of course, is that positive earnings may disappear given the craziness in the economy. A low valuation may protect it from further downside, but caution needs to be exhibited here with BBY.
Given that Intel (NASDAQ: INTC) reduced revenue expectations by a whopping $1 billion last night, I would say that caution is well warranted. BBY will be a winner in the long run, but in the short run more pain is the likely scenario.
Louis Navellier's PortfolioGrader Pro, which rates nearly 5,000 Wall Street stocks, rates BBY a C or Hold.
Jamie Dlugosch is a contributor to NavellierGrowth.com.
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Reader Comments (Page 1 of 1)
11-13-2008 @ 9:47PM
Larry Clockwant said...
This stock went to 10 cents so quickly I barely had time to put on my deodorant.
http://www.youtube.com/watch?v=d4oyTI0YlBU
11-14-2008 @ 1:46AM
Jessy Scholl said...
I can see Best Buy surviving in the long run and this includes a major attack on Wal-Mart. I am not saying that Best Buy will bomb Wal-Mart headquarters in Arkansas, I just say that Americans will be needing entertainment, computers, and appliances during a downturn no matter how bad. They have money stored up for events such as this and they will need to air attack ads against Wal-Mart, kind of like the same way that Apple is currently attacking Microsoft.