Why Merrill Lynch Is Growing Much More Bullish on Best Buy

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Although Best Buy Co. Inc. (NYSE: BBY) had a relatively weak fourth quarter, one key analyst believes that this electronics retailer is well-positioned to improve over the course of the year. So far this year, the stock is up about 20%, but this analyst sees shares rising about another 15% going forward.

Merrill Lynch upgraded Best Buy to a Buy rating from Neutral, and raised its price objective to $58 from $46. The firm raised its 2017 to 2019 estimates to $3.79/$4.14/$4.61 from $3.69/$4.05/$4.45. Merrill Lynch’s Denise Chai and Curtis Nagle listed out a few key reasons Best Buy won this upgrade:

  • Stronger than anticipated product cycles in phones, TVs and in time smart home technology.
  • Our view that key vendors will increasingly depend on Best Buy to showcase their best products or promote new tech like AR/VR and smart home.
  • Strong online growth as Best Buy has built a sophisticated, competitive omni-channel platform.
  • Upside potential from streamlined international operations.
  • New cost saving opportunities as the current $400 million target is nearly complete.
  • Increased focus on high margin services like in-home advisors and subscription warranties.

At the same time, the company is turning more positive on growth in its international segment. International saw improving momentum in 2016, with revenue positive in the previous third quarter for the first time in 23 quarters and EBIT up from −$4 million in 2015 to $101 million in 2016, its highest in five years.

Mexico is also an opportunity, and Best Buy plans to increase this store count by nearly 50% over the next two years (from 20 now). International currently represents 8% of total revenue and 6% of EBIT.

Merrill Lynch gave its investment rationale as follows:

Best Buy has executed well on its restructuring and taken out costs faster than expected while carefully managing spending needed to deliver the turnaround. Despite challenging industry conditions, Best Buy continues to win share and organically grow earnings. We believe that Best Buy is well positioned to benefit from strong consumer electronic product cycles and see ample room for accelerated capital return.

Shares of Best Buy were last seen up 0.4% at $51.34 on Tuesday, with a consensus analyst price target of $47.25 and a 52-week trading range of $28.76 to $52.61.