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BBY - Final Ver
- 1. BBY Valuation MMS analysts:Austin Taylor, Yunning (Emma) Zhang, Jingduo Bi, Nian Liu
- 2. Executive Summary We recommendagainst buying the BestBuy because of the following reasons: 1. The turnaround strategy is a paradox. 2. The financial valuations indicate that the company is overvalued.
- 3. Agenda • Business Strategy •Key Forecast Assumptions • Valuations • Sensitivity Analysis • Recommendation • Q&A
- 4. Business Strategy Current Strategy: CostLeadership Turnaround Strategy (“Renew Blue”*) Cost Leadership - More price competitive - Focus on core business activities - Shut down unprofitable stores - Employee termination Differentiation - Better customer’s physical experience - More customer-facing labor - Train store associates - Upgrade stores Competitive Advantages? Hard to balance between cost competitive and cost increased by differentiation **. Trend Sources: * BBY 2015 financial report. ** http://www.businessinsider.com/best-buys-strategy-is-a-paradox-2014-
- 5. Risk Analysis • Strongcompetition from traditional store based retailers, multi-channel retailers, internet-based business. • Failure to effectively manage cost. • Hard to attract qualified employees in key positions especially under a cost reduction strategy. • Change in credit ratings may limit capital access and borrowing cost.
- 6. Key Forecast Assumptions KeyForecast Assumptions Value Source 2016 Revenue Growth Rate -0.24% Yahoo Finance, Bloomberg… 2017-2020 Revenue Growth Rate 6.04% Thomson one, Yahoo Finance Thereafter Revenue Growth Rate 2.00% U.S GDP growth rate COGS in next three years -400 millions Letter to shareholders Restructuring Charge in 2016 100 millions BBC news Short Term Investments in 2016, 2017 150 millions BBC news
- 7. Valuation Best Buy CoInc NYSE: BBY - May 1 35.18 EVA MultipleFCFCE FCFU
- 8. Capital Structure &WACC rf 2.25% rd 4.925% rm-rf 7.10%Short term borrowings 0 Beta 1.85 Long term debt 1484 rE(CAPM) 15.41% Total on B/S debt 1484 Shares outstanding 351,468,000 Oper. lease debt 3111 Obs. Price, 5/01/2015 35.18 Combined Debt 4595 Market value equity 12,364,644,240 Market value equity (in miilions) 12365 Enterprise Value 16959 wE 72.91% wD 27.09% Tax rate (Notes 10) 35.80% Rwacc 12% Equity Debt Operating Asset View with Operating Lease
- 9. EVA Valuation Best BuyCo Inc NYSE: BBY - May 1 35.18 33.38 Overvalued
- 10. FCFU Valuation Best BuyCo Inc NYSE: BBY - May 1 35.18 26.58 Overvalued
- 11. FCFCE Valuation Best BuyCo Inc NYSE: BBY - May 1 35.18 27.79 Overvalued
- 12. Multiple Valuation Best BuyCo Inc NYSE: BBY - May 1 35.18 54.72 47.47 However, we don’t think these companies are very comparable to BestBuy because Wal-Mart sells more diverse products, Apple sells products made by itself and Staples is operating in a different industry. EV/Sales Mutiple EV/EBITDA Multiple Sales Revenue 40,339.00$ 1,387.00$ Ent Val Multiple 0.51 13.08 Enterprise Value 20,757.42$ 18,140.24$ -NonControlling Int - - -Current Liabilities Debt 41.00$ 41.00$ -Long Term Debt 1,484.00$ 1,484.00$ -Preferred Shares -$ -$ Equity Value 19,232.42$ 16,615.24$ Shares Outstanding 351,468,000 351,468,000 Intrinsic Share Price 54.72$ 47.27$ Best Buy - Projected Value Key Ratios Best Buy Apple Wal-Mart Staples Profit Margin 22.43% 38.59% 24.83% 25.79% ROA 7.36% 17.04% 8.03% 1.30% ROE 22.46% 35.42% 20.10% 2.54% P/E 10.54 15.64 15.64 78.43 Asset Turnover 2.64 0.79 2.38 2.18 Financial Leverage 3.05 2.08 2.50 1.94 Sales to NI Efficiency 2.78% 21.61% 3.37% 0.60%
- 13. Valuation Summary EVA 33.38Overvalued FCFU 26.58 Overvalued FCFCE 27.79 Overvalued Best Buy Co Inc NYSE: BBY - May 1 35.18
- 14. Sensitivity Analysis How willgrowth rate change valuation results? Not too much!
- 15. Conclusion The table aboveis the range of BBY valuation. As it shows, the maximum forecast price is $34.95, which still less than the current stock price. Combined with its self-conflict business strategy, we think BBY is overvalued.
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