However, Best Buy is also aggressively cutting costs. There are two areas where costs cuts are being implemented: administrative costs and costs of goods sold. Best Buy believes that there are $400 million in SG&A costs which can be cut from the North American business, and the company has already achieved $295 million of those cuts so far this year. The second area, cost of goods sold, will see cuts come more slowly. The company believes that it can reduce these costs by $325 million through making its supply chain more efficient and revamping how it deals with returned items. I wrote about this effort in previous article.
These cuts total $725 million, which if added to the $1 billion earned in 2012, leads to $5.05 per share in owner earnings. Now, the effect of lower prices will drive this number down a bit, but $5 per share in earnings is absolutely realistic. If Best Buy can succeed with its online initiatives to drive internet sales, then I believe the company can reach this goal within a few years.
If Best Buy can earn $5 per share, then the stock would be worth a lot more than $40 per share. Even based on just 2012 owner earnings $40 per share, it isn’t even all that expensive at just 13.5 times owner earnings. I think that people have greatly underestimated Best Buy’s earnings power.
Why Best Buy is different
Retail turnarounds seem to be all the rage these days, with Best Buy joined by companies like RadioShack Corporation (NYSE:RSH) and J.C. Penney Company, Inc. (NYSE:JCP). But Best Buy is different than these other cases because Best Buy never became unprofitable.
RadioShack Corporation (NYSE:RSH) saw every measure of profitability turn negative in 2012 as the company struggled to stay relevant. Back in December, I wrote an article entitled A Rare Value Opportunity which pointed out that at the time the stock was trading well below its current assets minus total liabilities. This is what’s called a net-net, and since then, the stock has risen nearly 50%. I would only buy RadioShack Corporation (NYSE:RSH) at this point if the stock price fell back into net-net status, as the company is continuing to lose money and the prospects of a turnaround are dim.
J.C. Penney Company, Inc. (NYSE:JCP) is also losing money, and a lot of it. The turnaround effort led by now-fired CEO Ron Johnson failed as the company alienated much of its loyal customer base, and a multi-billion loan backed by its real estate was required to ensure liquidity in the near future. J.C. Penney Company, Inc. (NYSE:JCP) is not unique, as there are plenty of discount department stores like Kohl’s Corporation (NYSE:KSS) which have been far more successful. Best Buy is the only major nationwide consumer electronics chain left, giving the company an advantage. J.C. Penney Company, Inc. (NYSE:JCP) has no such advantage and had to resort to begging its customers to come back in a series of ads.
The bottom line
The $40 price target put forth by Credit Suisse may turn out to be conservative if Best Buy’s plans play out. With huge cost cuts making the company more efficient and strategies in place to drive online sales, Best Buy could soon be earning $5 per share or more, leading to a stock price many times the 52-week low. Those still claiming that Best Buy is doomed need to look past the most basic numbers and see that Best Buy is getting stronger every day.
Timothy Green owns shares of Best Buy. The Motley Fool owns shares of RadioShack. Timothy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Bullish Upgrades Keep Rolling In for This Company originally appeared on Fool.com is written by Timothy Green.
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