Money Matters - Simplified

This Behemoth Is Down, But Not Out

 

Running a 24-hour live chat for charity was a challenge of my endurance as well as my mind. Plenty of great companies were brought up in our discussion, especially a few that had somehow fallen off my radar.




 I figured I'd spend some time discussing the reasons why one in particular, though down-trodden at present, could be in for a sizable rebound in the years to come.

Best Buy (NYSE: BBY) has been a roller-coaster ride over the past four years, netting buy-and-hold investors a 26% dividend-adjusted loss over that time span and giving them countless headaches. But don't reach for that Tylenol just yet because there are plenty of reasons to be bullish on Best Buy's long-term outlook.

Lack of competition
With the demise of Circuit City, Best Buy was expected to step in and dominate the consumer electronics space. We haven't seen this just yet: A soft consumer and weakened television sales negatively affected earnings in its most recent quarter. Despite this, Best Buy has a long track record of overcoming economic downturns as a stronger company, and it just might be increased online sales and phone sales that drag it out of the doldrums.

Competing against Best Buy in the consumer electronics space is a collection of less than exciting choices: RadioShack (NYSE: RSH) and hhgregg (NYSE: HGG).

RadioShack has been unable to differentiate itself as a second-market player for the better part of a decade. Consumers continue to flock to Best Buy for higher-end products and to RadioShack for smaller, lower-margin products.

Hhgregg, on the other hand, has a faster growth rate than Best Buy, but being so much smaller, it lacks the advertising budget to compete with Best Buy on a national level. It also has missed earnings expectations in two of its past three quarters, so growth aside it has a lot left to prove to investors about its consistency.

Fiscal responsibility
Best Buy is already an electronics behemoth, but it still understands how to take care of shareholders and maintain a conservative balance sheet.

It all starts with shareholders, who have been rewarded by a 100% increase in quarterly dividend rates over the past five years. Best Buy's yearly dividend now sits at a tempting 1.7% yield and is funded by the mountainous cash flow generated from maintaining a 25% gross margin, even in tough times.

These margins are supported through a combination of cost-cutting and maintaining proper inventory levels. Best Buy has one of the quickest inventory turnovers in retail, which allows its cash to be always working rather than tied up by merchandise sitting in a warehouse.

Foolish takeaway
Best Buy should be a long-term winner if it can maintain its margins and keep its rivals in its shadows. By continuing to grow its online business and controlling expenses, I suspect you'll see rising dividend payments and a higher stock price down the road.

© 2010 UCLICK L.L.C.