Does Weakness Create a “Best” or Worst Buy?
After producing gains of 130% in 2013, Best Buy Co., Inc. (NYSE:BBY) announced a mixed Q1 report, and is now trading lower by almost 5%.
In the quarter, Best Buy Co., Inc. (NYSE:BBY) missed revenue expectations by almost $1 billion. The company saw a 1.1% year-over-year decline in comparable-store sales, and a 190-basis-point drop in gross profit year over year. Meanwhile, the company actually beat expectations on the bottom line, providing some light at the end of the tunnel.
As we look ahead, the company is preparing for its “store-in-a-store” era. Best Buy Co., Inc. (NYSE:BBY) specifically notes that it will focus on this transition during the upcoming quarter, in an attempt to find new partners.
The company also saw an impressive 16% year-over-year boost in online sales during the quarter. According to the company, growth was greater in states where online sales tax is collected. This could be a trend to watch as individual states begin to require tax on goods purchased online.
With all things considered, I am encouraged with the company’s online growth and I am excited to see the outcome of its “store-in-store” approach. As a retailer, Best Buy Co., Inc. (NYSE:BBY) is very cheap. The stock trades at just 0.18 times its annual sales and only 10.5 times next year’s expected earnings.
Compared to large retailer Wal-Mart, Best Buy Co., Inc. (NYSE:BBY) trades at a 50% discount to sales and a 30% discount to next year’s earnings. Moreover, the electronics chain has a forward yield of 2.6%. Therefore, I think Best Buy’s upside potential and value create a solid buying opportunity.
A Solid Undervalued Company Worth Buying
Medtronic, Inc. (NYSE:MDT) slightly beat expectations on both the top and bottom lines. The stock is now trading higher by 5.5%.
The company grew its revenue by 5% year over year, while EPS grew 11% in the same period. Medtronic, Inc. (NYSE:MDT) now sees full-year growth of 3-4% with an almost 50/50 share between international and domestic sales.
Medtronic, Inc. (NYSE:MDT) is an efficient and stable large-cap company, with sales of almost $17 billion annually, strong profit margins over 20%, and a debt-to-assets ratio of less than 25%. Those metrics suggest the company manages its assets well and produces a solid return on its revenue.
Furthermore, the stock is trading at just 15.2 times earnings, which compares favorably to the S&P 500’s premium of 19 times earnings. Overall, I see no obvious risks associated with Medtronic, Inc. (NYSE:MDT), and I believe that the stock is a “buy” after earnings.
Waiting For Margin Improvements
The top post-earnings performance of the day definitely goes to Saks Inc (NYSE:SKS) The stock produced gains of 8% after beating expectations in its latest quarterly report. However, its comparable-store sales growth of 5.9% year over year, and full-year growth guidance of 4%-6%, created the most optimism among investors.
Along with impressive growth, the company says it plans to accelerate the launch of Off5th.com this fall. The company’s “OFF 5TH” stores have outperformed total store growth since opening in 2008, and Saks believes the new online channel will further boost growth and improve margins.
From an investment perspective, Saks Inc (NYSE:SKS) is fairly priced with other specialty retailers. It trades at a slight premium to earnings (with a P/E of 32 vs. the industry’s 23) but is cheaper on a sales basis (with a P/S of 0.71 vs. the industry’s 1.15).
My single concern is not the company’s valuation, but rather its margins. Saks Inc (NYSE:SKS)’ net margin of just 2% is especially low; the company must figure a way to increase profitability. Hopefully, the growth of online retail will help it expand that margin. Combined with new initiatives to maximize store space, that improvement could bode well for the company. As a result, I like the direction of the company and believe that it is worth additional due diligence.
Mixed Quarter Produces Solid Gains
Rexnord Corp (NYSE:RXN) rallied 5% on Tuesday after posting a mixed quarter and issuing a downbeat Q2 forecast. The stock’s gains came after the company issued longer-term guidance, suggesting growth of 1%-3% in 2013. For eager investors, the promise of future improvements apparently overshadowed Rexnord Corp (NYSE:RXN)’s immediate fundamental weakness.
Rexnord Corp (NYSE:RXN) is not cheap — it trades at 0.90 times sales with a forward P/E ratio of 17.0. Compared to the industrial industry, Rexnord’s valuation is a 20% premium based on future earnings alone.
While the company is bullish of its own future, I am not so optimistic on its outlook. Rexnord is a multi-platform industrial company with segments in process & motion control and water management. The company announced that it is still reviewing a strategic plan that could involve selling one of the two large segments. Therefore, I find its long-term guidance difficult to assess.
With this unknown future — and a mixed report — I am not buying the idea of long-term guidance.
Conclusion
Looking at my three preferred stocks from this list, I think Saks presents the most upside potential. Medtronic, Inc. (NYSE:MDT) is a great and balanced company, but is not producing explosive growth.
Best Buy Co., Inc. (NYSE:BBY) is cheap but is producing no growth. Its upside is tied to the unknown success of its “store-in-store” strategy, and also the outcome of online sales tax.
Saks Inc (NYSE:SKS) is cheap, growing, and is launching a larger scale online segment. In my opinion, it presents the greatest combination of value and upside to make it the most compelling of the three.
The article Are These Tuesday Post-Earning Movers a Buy? originally appeared on Fool.com and is written by Brian Nichols.
Brian Nichols is long BBY. The Motley Fool owns shares of Medtronic. Brian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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