By Sam Boughedda
BofA Securities analyst Elizabeth Suzuki downgraded Best Buy (NYSE:BBY) from Buy to Neutral, lowering the firm's price target on the stock to $90 from $110.
The analyst told investors in a note that as the US consumer pulls back on discretionary spending, there is an increasing risk to Best Buy’s FY24 and FY25 earnings.
"On our lowered FY24E of $10.08, the stock currently trades at a P/E of about 7x. However, if consumer spending behavior continues to favor needs over wants and BBY earnings revert to pre-COVID levels ($7.90 in FY20), its P/E would be around 9x, consistent with low-growth brick & mortar retailers and our valuation basis for our $90 PO (lowered from $110 based on 10x ‘24E P/E previously," wrote Suzuki.
The analyst added that pandemic-related demand for home entertainment and home office products, as well as government stimulus payments, contributed to a surge in Best Buy's sales growth in FY21 and FY22 from the prior 5-year sales growth rate of 1.6% to an average of 9% for those first two years of the pandemic.
"Although the company expects a modest YoY decline in sales from $51.8bn in FY22 to $49.3bn-$50.8bn in FY23, we think the downside risk could be a full reversion to the prior trend line. In other words, if BBY sales had continued at the company’s pre-COVID 5-year average growth pace of 1.6%, FY25 sales would be on track to reach only about $47bn, about $8bn below the midpoint of BBY’s FY25E guidance range," said Suzuki.
Best Buy stock is up 2.3% early Tuesday despite the downgrade.