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Finance Final Power Point

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Managerial Finance project for Best Buy

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Finance Final Power Point

  1. 1. Financial Analysis Project Nora Baertschi Nicolas Bigler Brian DeMontfort
  2. 2. <ul><li>Began in 1966 as Sound of Music </li></ul><ul><li>Changed name to Best Buy 1983 </li></ul><ul><li>Incorporated in 1985 in Minnesota </li></ul>
  3. 3. Historical Growth <ul><li>Total Revenues increased 28 million in 8 years </li></ul><ul><li>Estimated 1000 U.S. stores </li></ul><ul><li>International Expansion </li></ul>
  4. 4. Brian Dunn CEO <ul><li>CEO of Best Buy Inc. since June 24, 2009 </li></ul><ul><li>23 years experience with Best Buy </li></ul>
  5. 5. Recent Events <ul><li>Partnerships </li></ul><ul><li>Best Buy is going green </li></ul><ul><li>Breaking into the U.K. market </li></ul>
  6. 6. Industry Overview <ul><li>Retail- Computer and Electronics Industry </li></ul><ul><li>Industry Growth </li></ul><ul><li>Revenues: Industry leader </li></ul><ul><li>Revenue growth: Rank 5 </li></ul><ul><li>Return on investments: Rank 4 </li></ul>Retail-Computer and Electronics S&P 500 0.23% -5.20%
  7. 7. Financial Health <ul><li>Activity ratios </li></ul><ul><ul><li>Strong sales </li></ul></ul><ul><ul><li>Effective use of fixed assets </li></ul></ul><ul><ul><li>Efficient in collecting money from customers </li></ul></ul>Best Buy Industry Inventory Turnover 7.16 0.20 Fixed Asset Turnover 5.9 0.08 Accounts Receivable Turnover 24.1 1.32
  8. 8. Financial Health <ul><li>Liquidity Ratios </li></ul><ul><ul><li>Ratio decreasing over past years </li></ul></ul><ul><ul><li>Due to increase in liabilities </li></ul></ul><ul><ul><li>Low liquidity -> risky </li></ul></ul>Best Buy 2009 Buy 2007 Industry 2008 Current Ratio 0.97 1.44 1.25
  9. 9. Financial Health <ul><li>Profitability Ratios </li></ul><ul><ul><li>Higher margins than industry average </li></ul></ul><ul><ul><li>Constantly falling -> price pressure from competitors </li></ul></ul>Best Buy Industry Operating Margin 3.91 0.13 Net Profit Margin 2.23 0.07
  10. 10. Financial Health <ul><li>Common Stock Ratios </li></ul><ul><ul><li>People are willing to invest in Best Buy </li></ul></ul><ul><ul><li>Dividend Yield is increasing </li></ul></ul>Best Buy Industry P/E Ratio 14.59 0.47 Dividend Yield 1.96 0.02
  11. 11. Best Buy’s Stock (NYSE: BBY) <ul><li>416,539,000 shares of common stock </li></ul><ul><li>Market capitalization of $18.3 billion </li></ul><ul><li>Share last Traded at $43.54 (12/08/2009) </li></ul>
  12. 12. Price Evolution 2002-2009
  13. 13. Comparison Stock Return/Market Return <ul><li>Evolution of the Best Buy Stock and the S&P 500 over the last 5 years: </li></ul><ul><li>-Best Buy’s stock return more </li></ul><ul><li>volatile than S&P 500’s return </li></ul><ul><li>(higher highs and lower lows) </li></ul><ul><li>-During years 2005-2007, Best Buy’s stock </li></ul><ul><li>gained 38%, S&P 500 only 21% </li></ul><ul><li>-During the terrible 2008 crisis, Best </li></ul><ul><li>Buy’s share lost 60%, S&P 500 “only” </li></ul><ul><li>dropped by 38% </li></ul>
  14. 14. Comparison Stock Return/Market Return <ul><li>Evolution of the Best Buy Stock and the S&P 500 over the last 12 months: </li></ul><ul><li>-Again, much higher volatility for BBY </li></ul><ul><li>Best Buy = lot of waves, high volatility </li></ul><ul><li>S&P 500 = steadier movement </li></ul><ul><li>-Rate of return over the last 12 months : </li></ul><ul><li>Best Buy: +84% </li></ul><ul><li>S&P 500: +23% </li></ul><ul><li>-Monthly average rate of return </li></ul><ul><li>Dec 08 – Nov 09: </li></ul><ul><li>Best Buy: 7.3% (with 2 months of more </li></ul><ul><li>than 30% rate of return) </li></ul><ul><li>S&P 500: 1.9% (no month with more </li></ul><ul><li>than 10% rate of return) </li></ul>
  15. 15. Beta / Risk of Best Buy <ul><li>Beta (Reuters Finance): 1.36 </li></ul><ul><li>Investors should be aware that investing in Best Buy’s stock comes with a fairly high degree of risk </li></ul><ul><li>In times of recession or crisis, the stock might drop severely </li></ul><ul><li>However, when the economy recovers or is doing well, the expected returns can be pretty high compared to the market return (as we saw in 2009) </li></ul><ul><li>Because of that, a good investor would diversify its portfolio with Best Buy shares along with lower-risk equities </li></ul>
  16. 16. Debt Policy <ul><li>- Best Buy has been increasingly relying on debt over the past years: </li></ul><ul><li>Debt ratio:                                             Debt-Equity ratio: </li></ul><ul><li>2007:   54.30%                                    2007:   1.19 </li></ul><ul><li>2008:   64.85%                                     2008:   1.85 </li></ul><ul><li>2009:   70.66%                                     2009:   2.41 </li></ul><ul><li>- High Leverage, but because Best Buy is a well established company, they can get away with it. </li></ul><ul><li>- Trend might be explained by the fact interest rates are decreasing and therefore it becomes cheaper for the company to borrow money. </li></ul>
  17. 17. Debt Policy <ul><li>$2,247 million in total debt </li></ul><ul><li>$1,111 million are long-term debt </li></ul><ul><li>More than 80% of the long-term debt is composed of 2 bonds </li></ul>
  18. 18. Debt Policy <ul><li>U.S. Corporate Debentures </li></ul><ul><li>Maturity date 07/15/20013 </li></ul><ul><li>Coupon rate 6.75% </li></ul><ul><li>Amount: $500 million. </li></ul><ul><li>Last Price: 110.074 </li></ul><ul><li>Fitch Rating: BBB+ </li></ul><ul><li>Yield: 3.73% </li></ul><ul><li>U.S. Treasury bond yield for similar maturity: 1.22% </li></ul>
  19. 19. Debt Policy <ul><li>U.S. Corporate Convertible </li></ul><ul><li>Maturity date 01/15/2022 </li></ul><ul><li>Coupon rate: 2.25% </li></ul><ul><li>Amount: $402.5 million </li></ul><ul><li>Last Price: 110.00 </li></ul><ul><li>Fitch Rating: BBB </li></ul><ul><li>Yield: 1.3% </li></ul><ul><li>U.S. Treasury bond yield for similar maturity: 3.43% </li></ul><ul><li>Low coupon rate because the bond holder can convert the bond into common stock. </li></ul><ul><li>For the company, benefit is a reduced cash interest payment. </li></ul><ul><li>The disadvantage is that the value of shareholder's equity is reduced due to the stock dilution expected when bondholders convert their bonds into new shares. </li></ul>
  20. 20. Summary <ul><li>SWOT ANALYSIS </li></ul><ul><li>Strengths: </li></ul><ul><li>Industry leader </li></ul><ul><li>Brand recognition </li></ul><ul><li>Low priced products </li></ul><ul><li>Strong online presence </li></ul>Weaknesses: -Impersonal customer service -High costs of large warehouses -High debt to equity ratio Opportunities: -Increasing demand for consume electronics -Opportunity to expand globally <ul><li>Threats: </li></ul><ul><li>Strong competitors </li></ul><ul><li>Economic downturn and decreasing consumer spending </li></ul>
  21. 21. Summary <ul><li>Recommendation for Best Buy’s stock: BUY </li></ul><ul><li>- The economic outlook is getting better. </li></ul><ul><li>- The company is well managed, has solid ratios (except liquidity and leverage ratios). </li></ul><ul><li>- Bullish trend should continue, but with lower returns than in 2009. </li></ul><ul><li>- Target of 10-15% annual rate of return over the next 2-4 years. </li></ul><ul><li>Analyst recommendations: </li></ul><ul><li>Buy: 7 </li></ul><ul><li>Outperform: 6 </li></ul><ul><li>Hold: 14 </li></ul><ul><li>Underperform: 0 </li></ul><ul><li>Sell: 0 </li></ul>

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