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R.C., The first thing that I have to tell you is that I'm not presently holding BBY. I have traded it on and off over the past few months when it was range bound between 20 and 24. The last time I traded it, I bought it at 20 3/8 and sold it for a loss at 18 3/4 because the chart was breaking support. It's hard to take a loss because charting doesn't always work, but in this case I guess you could say I got lucky. I tell you this because sometimes it's easier to look at a stock objectively when you aren't stuck in a losing position.
I'm not sure if I understood your comment about the fundamentals being thrown out the door. If you meant that the same store and total sales numbers released, down 3% and down 15% respectively, are very bad, I agree with you. But if you meant that we should now ignore the fundamentals for some reason, then I disagree with you.
BBY is in a tough industry. Electronics retailers are all over the place. Circuit City, Incredible Universe, Conns (in TX), Good Guys, Computer City, Comp USA, McDuffs (in TX), not to mention Service Merchandise, Best Products, and even department stores. How can the US support all these stores? It's beyond me. So the industry is crowded and some players will eventually get shoved out. Will BBY survive? Boy, I'm beginning to wonder. I don't say this to scare anybody who is holding this stock, but keep in mind that other very well known companies have failed to make it. Remember Eastern Airlines, Braniff Airlines, and even Best Products. Who would have thought during their hayday that these companies would be bankrupt and out of business. Best Products is hanging on, but just barely. The other two are history now.
My personal feeling is that BBY is in trouble because they have a falling cash position and rising debt. This will make it hard for them to compete with other companies that are more solvent. Don't get me wrong; BBY is not going to file for bankruptcy tomorrow. Their balance sheet looks okay right now. But check out these numbers and tell me how it looks to you.
Cash/Current Liabilities/Other Assets (Inventory)
Feb 95: $144.7M/632M/1B
Aug 95: $44M/1.1B/1.4B
Mar 96: $86M/925M/1.4B
Aug 96: $31M/1.2B/1.6B
These numbers show a falling cash position, rising current liabilities, and a fairly stable, though rising inventory. This isn't good, period. Anybody in this stock had better watch their cash position, because if it gets too low, banks may quit lending them money. And while they may be able to factor their inventory, I would guess that the value of the inventory could easily fall because of intense competition and also because technology is driving the costs of these goods down. I wouldn't at all be surprised if BBY takes a charge in the near future to account for falling inventory costs.
Another negative number is that BBY's interest coverage is only 2.35 versus 8.3 for the industry. Interest coverage, for those reading this thread who may not know, is earnings before interest and taxes divided by interest expense. The lower the number gets, the more scared banks get to lend more money.
BBY's long term debt has been stable, but the short term maturities are the ones that are going to hurt them. If I were their CFO, I'd be trying to convert some of the short term maturities to long term.
The other negative trend for BBY is that they have a much higher five year growth rate in sales than the rest of the industry (64.6% vs. 36.9%), but their profit margin is lower (24.4% versus 37.1% for the industry). This probably means that they are increasing sales by lowering prices more than anybody else. But in the long run I don't think this strategy will work because eventually they will run out of money and not be able to buy new inventory. What they need to do is lower their costs to improve profitability, not lower their revenue to increase volumes. Maybe a lesson from Home Depot could help their cause. Now that would be a real positive if they could hire an executive from HD that knows the ins and outs of a good merchandising strategy.
That's it for the fundamentals--now on to the technical picture. The monthly chart has support between 11 and 12. If that doesn't hold then I can see the price getting to 6 or 7. Gag!! That sounds ridiculous right. Well it certainly is possible if the fears of insolvency pop up. Keep an eye on the cash. If it keeps falling, very bad news--especially if debt continues to rise.
I learned a long time ago that it is hard to predict the short term movement of stock prices. I try--sometimes I'm right and sometimes I'm wrong. But you asked for it, so here it goes. I would sell BBY on any rally because the odds favor it making a new 52 week low. The book value as of Aug 96 was $10.18. Given their deteriorating financial picture, I can see the stock trading at book or below--so I see at least $10. Christmas had better be good at BBY or they will be in even bigger trouble next year.
Dan |
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