UNIVERSITY OF OREGON
INVESTMENT GROUP January 8th, 2011
Consumer Goods
Best Buy Co., Inc.
RECOMMENDATION: BUY
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares
Outstanding
Average daily volume
(3 month average)
Current market cap
$30.90 -­ $40.83
BBY / NYSE
1.19
408 M
7.1 M
14,057 M
Current Price
Dividend
Dividend Yield
$34.47
.60
1.8%
Valuation (per share)
DCF Analysis
Comparables Analysis
Target Price
Current Price
$44.48
$38.26
$41.37
$34.47
Summary Financials
Revenue
Net Income
Operating Cash Flow
2010 A
$49,694 M
$1,317 M
$2,206 M
B USINESS OVERVIEW
Best Buy Co., Inc. is a multinational retailer of consumer electronics, home office products, entertainment
software, appliance and related services. The company was founded Sound of Music in 1966, and legally changed its
name to Best Buy Co. in 1983. Best Buy offers retail service through a variety of brand names, including Best Buy,
The Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Napster, Pacific Sales, and
The Phone House. The company offers services in numerous countries around the world, and thus classifies its
Covering Analyst: Ari Siegel
Email: asiegel@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
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addition, members of UOIG may attHPSWWRREWDLQHPSOR\PHQWSRVLWLRQVZLWKILUPVKHOGLQ82,*¶VSRUWIROLR
Best Buy Co.
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revenues into two different operational categories: Domestic & International Revenue. The Domestic segment
includes all sales within the United States, while the International Segment includes sales from Europe, China, Canada,
Mexico and Turkey.
At the end of fiscal year 2010, the Domestic segment produced 75% of total company revenue through sales
at over 1,100 stores. The vast majority of these locations are Best Buy superstores, selling all the various products and
services that the company has available for retail. At a higher level of detail, Best Buy stores have offerings in six
revenue categories: consumer electronics, home office, entertainment software, appliances, services and other.
Consumer electronics consists of video and audio products, including televisions and MP3 players. Home office
revenue includes products such as personal computers, smart phones and commissions related to the sale of cell
phone, cable and internet service plans. Entertainment VRIWZDUHLQFOXGHVSURGXFWVVXFKDVYLGHRJDPHVDOHV'9'·V
&'·V DQG FRPSXWHU VRIWZDUH 7KH 6HUYLFH VHJment includes any sales consisting of service contract sales and
extended warranties, such as computer insurance through Geek Squad. Finally, the Other segment consists of noncore sales such as food and beverages. The revenue mix across these categories in the Domestic Segment is currently
as follows:
Domestic Sales Mix
Consumer Electronics
Home Office
Entertainment Software
Appliances
Services
. Other
39%
31%
19%
5%
6%
<1% The International Segment comprises the other 25% of total revenue produced by Best Buy. While this
segment produces less revenue, the total number of stores within this segment is much greater, at 2,835. This size
difference is largely due to smaller store outlets with more specific product focuses. The vast majority of stores within
this segment are a part of Best Buy Europe, a company that was acquired in fiscal year 2009. International revenue is
classified into the same six segments as the Domestic segment. Due to sales mix differences, gross margin in the
International Segment is slightly higher than the Domestic. The specific sales mix is as follows:
International Sales Mix
Consumer Electronics
26%
Home Office
45%
Entertainment Software
9%
Appliances
10%
Services
10%
Other
<1%
. As a whole, Best Buy sells non-HVVHQWLDOJRRGVPDNLQJWKHFRPSDQ\·VSHUIRUPDQFHVHQsitive to the economic
conditions and environments it operates in. The business is seasonal, with most of sales and earnings produced
around the Holidays in fiscal quarter four. Due to the maturity of the domestic market, comparable store sales
increases are driven in the long run by new technology and the replacement cycle for older technology. While no
VLQJOHFXVWRPHUPDNHVXSDQ\VLJQLILFDQWSRUWLRQRI%HVW%X\·VVDOHV35% of the company·VLQYHQWRU\ is purchased
from Apple, Hewlett-Packard, Samsung, Sony and Toshiba.
2
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BUSINESS AND GROWTH STRATEGIES
Best Buy describes its core philosophy as enriching the lives of its customers in the connected world. In
business terms, this has translated into four key strategies: increasing market share, international growth, connecting
the world, and increasing efficiency. The company has pursued these initiatives to varying degrees of success. With
the bankruptcy of Circuit City in 2009, Best Buy was able to organically capture the market share left open in the
consumer electronics industry. In contrast to this this unique incident, organic growth opportunities are rare, and so
top line growth is generally pursued through mergers and acquisitions.
The majority of international stores owned by Best Buy are not in fact operated under the Best Buy
brand name. In China, Best Buy operates the consumer electronics chain Five Star, while in Canada the company
operates stores under the brand name Future Shop. Future international growth will likely be through the purchase of
pre-existing consumer electronics retail chains as oppose to the direct opening of Best Buy stores. These pre-existing
chains would then be PRGLILHGWRFRQIRUPWR%HVW%X\·Vbusiness model. The second use of Best Buy acquisitions
are the incorporation of services into pre-existing Best Buy stores. A recent example of this is the acquisition of Geek
Squad. This company specialized in technology service and repair, and now Geek Squad centers are now present in
the vast majority of Best Buy stores today.
%HVW%X\·VLQFUHDVLQJIRFXVRQWKHFRQQHFWHGZRUOGKDVEHFRPHDQLPSRUWDQWSDUWRIWKHFRPSDQ\·V
growth strategy. While in the past Best Buy has focused on solely consumer electronics, it is in the process of shifting
towards providing end to end solutions for its customers. The company is no longer interested in selling just a
notebook, but the software, internet connection and insurance that go with it. The most important piece of this
strategy today is Best Buy Mobile. Best Buy Mobiles are either formatted as their own individual stores, or as kiosks
within larger Best Buy locations. At these locations, customers can look at cell phones and data plan options from
across numerous cell phone providers and choose which technology and plan fits them the best. In addition to
profiting from the sale of cell phones, the company is also paid a sales commission by the various cell phone
companies when a customer purchases a new cell phone plan specifically through a Best Buy Mobile. The addition of
these services continues to grow sales and increase overall gross margin, due to the low costs of selling data services.
MANAGEMENT AND EMPLOYEE RELATIONS
Brian Dunn is the current Chief Executive officer of Best Buy. He began with the company in 1985 as a sales
associate, and worked his way through increasingly important management and executive positions. Large portions of
executive compensation at Best Buy are through options awards, and insider ownership is currently at 17%. At the
lower level, Best Buy employees are not paid on commission, allowing them to let the customer drive the purchasing
process.
RECENT NEWS
x
x
Best Buy Announced Regular Quarterly Cash Dividend (12/15/2010) - Bloomberg
o Best Buy announced its regular quarterly cash dividend of 15 cents per common share. Best Buy has
seen consistent dividend growth since 2005.
Best Buy shares slide after results disappoint (12/14/2010) ² Marketwatch
o Best Buy shares fell more than 15% in one day after reporting disappointing third quarter results.
While margins widened, sales expectations were missed due to lower demand for televisions, note
books and videogames. Management estimated market share declined 1.1 percentage points.
Potential reasons for the demand shortfall include too much focus on margin growth, and BesW%X\·V
decision this year to not focus as much on opening price points for larger televisions. This price
point miscalculation was reflected by a 10% comparable store sales drop in the consumer electronics
3
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x
segment. Overall, the price dropped so significantly not solely because of a lacking third quarter, but
because a disappointing third quarter indicates a disappointing and more important fourth quarter.
The Best Deal in Best Buy Just Might Be Its Stock (10/3/2010) ² Wall Street Journal
o In contrasts to a disappointing third fiscal quarter, this article discusses the excellent second quarter
results Best Buy reported at the end of August. Investors expected on average earnings of 42 cents
per share, and the company reported 60 cents per share.
INDUSTRY
The consumer electronics industry retails a range of appliances and electronical equipment. Inventory is
purchased from original equipment manufacturers before being passed on to basic consumers. Excluding internet
retailers, industry revenue is currently estimated to be over $80 billion dollars a year. Competition is fierce, with a
moderate amount of consolidation in the industry. Best Buy has a market share of just over 40%, followed by
RadioShack Corporation with a market share of 5%. After these two larger firms, no other retail chains control a
significant amount of the market. On the internet, companies such as Amazon and EBay are also competing for
consumer electronic sales. Various types of products sold are as follows:
As a result of additional competition from online retailers and a recovering US economy, overall revenue
growth for non-online consumer electronics retailers is expected to be a modest 2.5% for the next several years.
Domestically, the industry is mature, and so above average growth must come from capturing market share. As a
whole, growth is driven by two main factors: the electronic replacement cycle and technological progress. The
HOHFWURQLFUHSODFHPHQWF\FOHGHVFULEHVWKHSURFHVVZKHUHFRQVXPHU·VHOHFWURQLFJRRGVZHDURXWRYHUWLPHDQGPXVW
be replaced every few years. Technological progress leads to sales of new electronics such as smartphones or 3-D
televisions, which increase overall industry size. The industry itself is sensitive to economic conditions, and sales
decline in periods of economic uncertainty. Key drivers of overall success include GDP growth, per capita disposable
income and consumer sentiment. IbisWorld projections of these key indicators are as follow, but should be taken
with a grain of salt considering the uncertainty surrounding any long term economic projections:
4
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In certain segments of the industry, prices are falling quickly as technology becomes more widespread. The
average price of a TV has fallen around 50% since 2006 as the product has become more mature. When technology is
first introduced to the industry, its price is generally at the highest point. An example of this trend is high priced 3D
televisions, as compared to now very low margin video game hardware sales. As a whole, margins are slim within the
industry, with an average net profit margin of around 3%. The majority of costs are purchases of inventory, followed
by the wages of employees.
S.W.O.T. ANALYSIS
Strengths
x
Valuable and well-known brand
x
Strong fundamentals
Weaknesses
x
Increased sales growth tends to decrease margins, and vice versa
x
Highly competitive industry
Opportunities
x
International Markets
x
New technology (3D televisions, smartphones, etc.)
x
Connected World strategy
Threats
x
Increasing competition from online retailers
x
Loss of market share
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PORTER·S 5 FORCES ANALYSIS
Supplier Power
Moderate and steady. While Best Buy does depend on a few key suppliers for its products, as a whole they
have a restricted ability to change prices due to the commoditization of many items Best Buy sells.
Barriers to Entry
Moderate and steady. A relatively small amount of capital is required to set up an electronics store.
Consumers do expect a minimum selection of products and size of retail location.
Buyer Power
Low and steady. Consumers at an individual level have very little say in what is charged for specific products.
Threat of Substitutes
Low and steady. There are no real substitutes for electronic goods.
Degree of Rivalry
High and increasing. While there has always been competition between various electronic retail stores, the
addition of online retailers is leading to a higher degree of rivalry.
COMPARABLES ANALYSIS
EV/EBITDA, EV/Operating Cash Flow and EV/Revenue were all used to find an implied value for Best
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Cash Flow and Revenue lagging twelve months, respectively.
This comparables analysis uses a more quantitative method than has historically been the practice within the
investment group. As oppose to the subjective weightings of comparable companies, weightings were determined by
equating the fundamentals of comparable companies to the fundamentals of Best Buy. While not a perfect measure
of value, this method should provide a more accurate valuation of a given company. The weightings process is
explained after a description of the comparable companies used in the analysis.
Staples, Inc. (SPLS) ² 11%
Staples, Inc. operates as an office products company. The company sells various
office supplies and services, business machines and related products, computers and
related products and office furniture. It also provides high-speed, color and selfservice copying, other printing services, faxing and pack and ship services (Stables
10-k). Staples business model is similar to that of Best Buy. Both firms operate large
numbers of consumer electronics retail stores both internationally and domestically
while facing increasing online competition. The main difference between the two companies is slight product
differentiation due to Staples focuVRQWKHRIILFHDQG%HVW%X\·VIRFXV on the connected world.
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Using a one year regression, Staples has a beta slightly lower than that of Best Buy, at .95. The company has
consensus forecasted growth for the next few years at a slightly higher rate than Best Buy as well. Its enterprise value
LVVOLJKWO\KLJKHUWKDQ%HVW%X\·VGXHWRDODUJHUPDUNHWFDSZLWKDUHODWLYHO\VLPLODUOHYHOof debt. Staples has a higher
gross and net margin.
Dell, Inc. (DELL) ² 17%
Dell Inc. designs, develops, manufactures, markets, sells and supports computer
systems, as well as provides related services worldwide. It offers desktop PCs;;
notebook computers, mobile workstations, and smartphones servers and
networking products;; storage solutions, including storage area networks,
network-attached storage, direct attached storage, disk and tape backup systems,
and removable disk backup;; and printers and displays. The company also
provides third-party software products, such as operating systems, business and
office applications, anti-virus and related security software, and entertainment software;; and peripheral products, such
as printers, televisions, notebook accessories, mice, keyboard, networking and wireless products, digital cameras,
power adapters and scanners. The company sells its products through its sales representatives, telephone-based sales,
and online at dell.com, as well as through indirect sales channels (Dell 10-k). Dell is an original equipment
manufacturer, meaning it produces the electronic equipment it sells ² and often sells its products indirectly through
various retailers. While the company has a different business model than Best Buy, the success of Dell strongly
correlates with the success of consumer electronics retailers ² as when a company like Best Buy is selling a large
number of computers, it will purchase more inventory from Dell. Due to this relationship, both firms share a number
of business risks. An important difference to note is that due to Dells position as an original equipment
manufacturer, it does not face the online competition that other comparable companies in this analysis do.
Using a one year regression, Dell has a beta of 1.4 ² somewhat higher than the systemic risk of Best Buy.
The company·s consensus forecasted profitability growth over the next few years is higher than Best Buys, and is also
the highest of the comparable companies used in this valuation. Dell is a slightly larger company than Best Buy, with
an enterprise value of approximately $20 billion. This is due to a larger market capitalization, and a proportionally
larger amount of debt offset partially by a large cash holding. Dell has a slightly higher margin than Best Buy.
GameStop Corp. (GME) ² 33%
GameStop Corp. operates as a retailer of video game products and personal
computer entertainment software. It sells new and used video game
hardware;; video game software;; video game accessories, including
controllers, memory cards, and other add-ons;; PC entertainment software;;
and strategy guides and trading cards. The company sells its products
through its stores, as well as through electronic commerce web sites (GameStop 10-k). While GameStop operates
within the consumer electronics industry, it operates within a specific segment ² namely the sale of electronics related
to playing games. Both GameStop and Best Buy operate a large number of stores internationally, and face similar
RSHUDWLQJULVNV*DPH6WRS·VEXVLQHVVIDFHVHYHQPRUHORQJ-term competition from online retailers than Best Buy, as
almost all of its sales are related to software that can be downloaded over the internet, while the majority of Best Buy
sales cannot be transferred to a customer with just an internet connection (televisions, appliances, etc.).
7
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Using a five year regression, GameStop has a beta of 1.09. A one year regression produced unreasonably low
results. GameStop is forecasted to have lower profitability growth than Best Buy over the next few years, consistent
with the long term expectation of its competition from online retailers. The company is significantly smaller than Best
Buy, with an Enterprise Value of $3.5 billion and very little debt. GameStop has a slightly higher margin than Best
Buy due to its higher margin software sales.
RadioShack Corp. (RSH) ² 39%
RadioShack Corporation engages in the retail sale of consumer
electronic goods and services through its RadioShack store chain and nonRadioShack branded kiosk operations. Its products include postpaid and
prepaid wireless handsets and communication devices, such as scanners and
global positioning system products;; home entertainment, wireless, music,
computer, video game, and GPS accessories;; media storage, power adapters,
digital imaging products, and headphones;; home audio and video end-products, personal computing products,
residential telephones, and voice over internet protocol products;; digital cameras, digital music players, toys, satellite
radios, video gaming hardware, camcorders, and general radios;; general and special purpose batteries and battery
chargers;; and wire and cable, connectivity products, components and tools, and hobby products. The company also
provides access to third-party services, such as wireless telephone activation, prepaid wireless airtime, and extended
service plans (RadioShack 10-k). In terms of a business model, RadioShack is by far the most comparable publically
WUDGHGFRPSDQ\WR%HVW%X\:KLOHWKHPDMRULW\RIWKHFRPSDQ\·VRSHUDWLRQVDUHGRPHVWLFLWVHOOVPDQ\RIWKHVDPH
products and services as Best Buy through the exact same retail format.
Using a 1 year regression, RadioShack has a beta of 1.02. Over the next few years, the company is expected
to grow profitability at a slightly lower rate than Best Buy. RadioShack is a much smaller company than Best Buy,
with an Enterprise Value of approximately $2 billion, and a proportionally larger amount of debt. RadioShack has a
slightly higher margin than Best Buy.
Weightings
Fundamentally, the multiple a company should be trading at should is determined by the same variables that
are important in a Discounted Cash Flow valuation. At the bottom line, these variables are free cash flow, the
expected growth of free cash flow, and the discount rate. Therefore, in order to perform an accurate relative
valuation, the final weighted average fundamentals of comparable companies used should be the equivalent of the
fundamentals of the company being valued. In other words, if one is going to value Best Buy, one should price it by
looking at companies that are going to produce the same amount of cash flow at the same levels of risk as Best Buy.
Using expected EBITDA growth over the next 3 years and beta as a proxy for growth and risk, weights were chosen
that reflect the same expected growth and risk as Best Buy. The use of companies from within the same industry as
Best Buy helps to control for longer term growth and risk trends not reflected in short term numerical forecasts. The
analysis is as follows:
8
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The University of Oregon Investment Group
SPLS
DELL
Weight
11%
17%
Beta
0.96
1.43
EBITDA (3 Years compounded) 17.42% 34.93%
RSH
33%
1.06
9.08%
GME
39%
0.98
4.55%
Weighted Average BBY
1.08
12.63%
1.19
11.25% Using the weights above gives an accurate representation of what Best Buy should trade at within the
comparables model. While this method does not resolve all issues within a relative valuation, it should provide an
accurate and less subjective representation of the value of Best Buy.
DISCOUNTED CASH FLOW ANALYSIS
A bottom up approach was used for the discounted cash flow valuation. The majority of line items were
projected as a percentage of sales in order to find free cash flow to the firm.
Revenue
Revenues were projected by first breaking sales into their two operating segments, Domestic and International. From
that point, a revenue-per-store model was used to project the sales of each segment. In the Domestic segment,
revenue-per-store is forecasted to increase at modest rates due to market maturity, after recovering from a short term
loss of market share. In the international segment, Best Buy still has a significant amount of room to increase sales.
In addition, the company is in the process of transforming smaller Best Buy Europe stores into larger centers like the
ones seen in the United States. As a result of these two factors, revenue growth per store is forecasted at higher rates
for the next few years, before decreasing moderately to levels slightly above the Domestic segment.
Cost of Revenue
Cost of Revenue LVIRUHFDVWHGWRFRQWLQXHWRGHFUHDVHRYHUWKHQH[WILYH\HDUVDV%HVW%X\·VKLJKHUPDUJLQFRQQHFWHG
world strategy continues to decrease variable costs. These cost decreases should come at a somewhat slower rate than
in the past, as this past quarter was a wake-up call to management, and should lead to more focus on sales instead of
margin growth. Cost of revenue is forecasted to begin to increase once the connected world strategy has been
completely employed due to increased competition from online retailers. A higher gross margin in the international
segment should somewhat offset margin pressure from online retailers as the international segment becomes a larger
part of overall revenue.
Depreciation and Amortization
Depreciation has been increasing over the last few years as a result of recent acquisitions and increased store
remodeling. Due to these factors, D&A is forecasted to remain at these higher levels for the next few years before
trailing back to historical levels.
Operating Expenses
SG&A has been deleveraging over the last two years as a result of comparable store sales decreases and a weak
economy. In addition, the acquisition of Best Buy Europe increased overall SG&A as a percentage of revenue due to
%HVW%X\(XURSH·Vhigh operating costs. As management returns its focus to top line growth, and the effects of the
recession wear off, SG&A is forecasted to decrease into the terminal year towards pre-recession levels.
Tax Rate
Best Buy has had a historically volatile tax rate. Going forward, the tax rate was projected at a constant 36%, an
approximate weighted average marginal tax rate of the countries it operates in. The final valuation was not sensitive
to this assumption within the range of plausible tax rates.
9
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Net Working Capital
Best Buy has historically maintained a current ratio between 1.1 and 1.2. Lacking any significant business model
changes, net working capital was forecasted within the middle of this range in the short term, before trending down
towards the bottom of the range as increasing services sales decrease inventory as a percentage of sales.
Capital Expenditures
Capital Expenditures are forecasted to increase slightly over the next few years as Best Buy Europe stores are
remodeled into larger retail locations. This focus on remodeling will mean less focus on acquisitions, and acquisitions
were projected at smaller percentages of revenue over the next two year before being projected as a constant rate
similar to historical levels into perpetuity. Approximately one third of capital expenditures are related to new store
openings, one half related to information technology and the last portion to store projects.
Beta
A Hamada calculation was used to estimate Best Buys beta. A regression would have been inappropriate for use
considering Best Buy·s recent acquisitions and stock price volatility. The Hamada calculations can be found in
appendix 6.
Cost of Debt
Best Buy issued debt in June 2008 at a fixed rate of 6.75%, due in July of 2013. This is the only significant recent
issuance of long term debt, and so was used as the cost of debt. This cost is consistent with Best Buys current credit
rating of BBB+ (Fitch Ratings Ltd.).
RECOMMENDATION
Short term volatile price movements at Best Buy have provided a potentially valuable investment opportunity.
While this year the company has faced market share loss, in the long term continued technological progress and the
consumer electronics replacement cycle should lead to overall moderate cash flow growth into perpetuity. In the face
of increasing competition for sales from an onOLQHSUHVHQFH%HVW%X\·VPDUNHWOHDGLQJSRVLWLRQLQRIIHULQJIXOO\
Target Price
connected solutions and products customers prefer to purchase
Comparables (50%)
$ 38.26
in store should allow for continued success. Both comparables
DCF (50%)
$ 44.48
and discounted cash flow valuations suggest an undervaluation,
Final Price
$ 41.37
and thus I am recommending a BUY for the Tall Firs and Svigals·
Portfolios, with a target price of $41.37.
Undervaluation
20.02%
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APPENDIX 1 ² COMPARABLES ANALYSIS
The University of Oregon Investment Group
($ in millions, except per share data)
Stock Characteristics
Current Price
50 Day Moving Avg.
200 Day Moving Avg.
Beta
Size
ST Debt
LT Debt
Cash and Cash Equiv.
Minority Interest
Preferred Stock
Diluted Share Count
Market Cap
Enterprise Value
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense (MRQ)
Debt/Equity (MRQ)
Debt/EBITDA (LTM)
EBITDA/Interest Expense (LTM)
Operating Results
Revenue (LTM)
EBITDA (LTM)
Operating Cash Flow (LTM)
Valuation
EV/Revenue
EV/EBITDA
EV/Operating Cash Flow
11.00%
17.00%
33.00%
39.00% Weighted Average
SPLS
DELL
GME
RSH
BBY
$
$
$
$
$
$
$
$
$
34.47 $
41.31 $
38.00 $
1.59
23.35 $
21.69 $
20.44 $
0.95
723
1,101
927
-
590
2,055
1,370
7
$
$
$
$
408
14,057 $
14,954 $
$
$
$
$
13.69 $
14.09 $
13.22 $
1.40
826
5,168
13,412
-
22.91 $
20.02 $
19.84 $
1.09
18.56
20.07
20.47
1.02
249
181
(1)
350
328
720
-
$
$
$
$
722
16,854 $
18,136 $
1949
26,682 $
19,264 $
153
3,512 $
3,579 $
25%
4.60%
6.70%
2.20%
26.40%
6.20%
8.50%
3.00%
17.70%
6.50%
7.50%
4.80%
25%
7.10%
8.90%
4.20%
28.60%
8.70%
10.80%
4.80%
21
0.13
52.8
0.16
52
0.22
9.7
0.07
10.4
0.30
$ 50,569.00
$ 3,807.00
$ 1,931.00
0.30 x
3.93 x
7.74 x
$ 24,535.80
$ 2,150.50
$ 1,501.10
0.74 x
8.43 x
12.08 x
$ 60,656.00
$ 4,010.00
$ 3,754.00
0.32 x
4.80 x
5.13 x
$ 9,305.00
$ 820.80
$ 633.70
0.38 x
4.36 x
5.65 x
Metric
EV/Revenue
EV/EBITDA
EV/Operating Cash Flow
Price Target
Current Price
Under (Over) Valued
$
$
$
$
123
2,285 $
2,242 $
1.10
8,440
7,325
25.32%
7.52%
9.36%
4.40%
0.19
$ 4,423.10
$
800.60
$
279.00
0.51 x
2.80 x
8.04 x
0.46 x
4.28 x
7.20 x
Implied Price
54.83
37.71
31.89
Weight
10.00%
70.00%
20.00%
38.26
34.47
11.00%
11
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APPENDIX 2 ² DISCOUNTED CASH FLOWS ANALYSIS
The University of Oregon Investment Group
($ in millions, except per share data)
Total Company Revenue
% Y/Y Growth
Cost of Revenue
% Revenue
D&A
% Revenue
Gross Profit
Gross Margin
Operating Expenses
SG&A
% Revenue
EBIT
% Revenue
Other (Expense) Income
% Revenue
Interest Expense
% Revenue
Unusual Expense
% Revenue
Pre-tax Income
% Revenue
Less Taxes (Benefit)
Tax Rate
After-tax Ajdustments - Net
Net Income
Net Margin
Add Back Depreciation and Ammortization
% Revenue
Add Back Interest Expense*(1-Tax Rate)
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
Change in Net Working Capital
Capital Expenditures
% Revenue
Net Assets from Acquisitions
% Revenue
Unlevered Free Cash Flow
Discounted Unlevered Free Cash Flows
2007
$ 35,934
$
$ 27,165 $
75.60%
$
509 $
1.42%
$ 8,260 $
22.99%
$
$
$
$
$
$
$
$
6,229
17.33%
2031
5.65%
162
0.45%
31
0.09%
32
0.09%
2130
5.93%
752
35.31%
(1)
1,377
3.83%
509
1.42%
20
1906
5.30%
9,081
25.27%
6,301
17.53%
2,780
7.74%
$
$
$
$
$
$
$
$
$
733 $
2.04%
$ -­ $
0.00%
$
$
2008
40,023
11.38%
30,477
76.15%
580
1.45%
8,966
22.40%
6,805
17.00%
2161
5.40%
129
0.32%
62
0.15%
0
0.00%
2228
5.57%
815
36.58%
(6)
1,407
3.52%
580
1.45%
39
2026
5.06%
7,342
18.34%
6,736
16.83%
606
1.51%
(2,174)
797
1.99%
421
1.05%
3,403
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2009
45,015
12.47%
34,017
75.57%
793
1.76%
10,205
22.67%
8,191
18.20%
2014
4.47%
35
0.08%
94
0.21%
255
0.57%
1700
3.78%
674
39.65%
(23)
1,003
2.23%
793
1.76%
57
1853
4.12%
8,192
18.20%
8,381
18.62%
(189)
-0.42%
(795)
1,303
2.89%
89
0.20%
1,345
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2010
49,694
10.39%
36,608
73.67%
926
1.86%
12,160
24.47%
9,872
19.87%
2288
4.60%
54
0.11%
94
0.19%
53
0.11%
2195
4.42%
802
36.54%
(76)
1,317
2.65%
926
1.86%
60
2303
4.63%
10,566
21.26%
8,943
18.00%
1,623
3.27%
1,812
615
1.24%
2,316
4.66%
(124)
0.5
2011 Q12 A 2011 Q34 E 2011 A+E
$ 22,126 $ 28,066 $ 50,192
1.00%
$ 15,934 $ 20,707 $ 36,641
72.01%
73.78%
73.00%
$
481 $
673 $
1,154
2.17%
2.40%
2.30%
$
5,711 $
6,687 $ 12,398
25.81%
23.82%
24.70%
1.5
2012 E
$ 52,700
5.00%
$ 38,208
72.50%
$ 1,186
2.25%
$ 13,307
25.25%
2.5
2013 E
$ 55,008
4.38%
$ 39,606
72.00%
$ 1,238
2.25%
$ 14,164
25.75%
3.5
2014 E
$ 58,278
5.94%
$ 41,669
71.50%
$ 1,311
2.25%
$ 15,298
26.25%
4.5
2015 E
$ 61,431
5.41%
$ 44,230
72.00%
$ 1,351
2.20%
$ 15,849
25.80%
5.5
2016 E
$ 64,635
5.22%
$ 46,699
72.25%
$ 1,390
2.15%
$ 16,547
25.60%
6.5
2017 E
$ 67,594
4.58%
$ 49,005
72.50%
$ 1,419
2.10%
$ 17,169
25.40%
7.5
2018 E
$ 69,578
2.94%
$ 50,618
72.75%
$ 1,426
2.05%
$ 17,534
25.20%
8.5
2019 E
$ 72,656
4.42%
$ 53,039
73.00%
$ 1,453
2.00%
$ 18,164
25.00%
$ 75,517
3.94%
$ 55,127
73.00%
$ 1,510
2.00%
$ 18,879
25.00%
$
$ 11,462
21.75%
$ 1,845
3.50%
$
126
0.24%
79
0.15%
$ 26.35
0.05%
$ 1,866
3.54%
$
672
36.00%
$
(53)
$ 1,141
2.17%
$ 1,186
2.25%
51
$ 2,378
4.51%
$ 10,408
19.75%
$ 9,223
17.50%
$ 1,186
2.25%
$
(69)
$
922
1.75%
$
105
0.20%
$ 1,524
$ 1,300
$ 11,827
21.50%
$ 2,338
4.25%
$
132
0.24%
83
0.15%
$ 27.50
0.05%
$ 2,360
4.29%
$
850
36.00%
$
(55)
$ 1,455
2.65%
$ 1,238
2.25%
53
$ 2,746
4.99%
$ 10,726
19.50%
$ 9,626
17.50%
$ 1,100
2.00%
$
(86)
$ 1,100
2.00%
$
275
0.50%
$ 1,731
$ 1,329
$ 12,384
21.25%
$ 2,914
5.00%
$
140
0.24%
87
0.15%
$ 29.14
0.05%
$ 2,937
5.04%
$ 1,057
36.00%
$
(58)
$ 1,821
3.13%
$ 1,311
2.25%
56
$ 3,189
5.47%
$ 11,248
19.30%
$ 10,199
17.50%
$ 1,049
1.80%
$
(51)
$ 1,166
2.00%
$
291
0.50%
$ 2,074
$ 1,432
$ 12,901
21.00%
$ 2,949
4.80%
$
147
0.24%
92
0.15%
$ 30.72
0.05%
$ 2,973
4.84%
$ 1,070
36.00%
$
(61)
$ 1,841
3.00%
$ 1,351
2.20%
59
$ 3,252
5.29%
$ 11,856
19.30%
$ 10,750
17.50%
$ 1,106
1.80%
$
57
$ 1,229
2.00%
$
307
0.50%
$ 1,966
$ 1,221
$ 13,412
20.75%
$ 3,135
4.85%
$
155
0.24%
97
0.15%
$ 32.32
0.05%
$ 3,161
4.89%
$ 1,138
36.00%
$
(65)
$ 1,958
3.03%
$ 1,390
2.15%
62
$ 3,410
5.28%
$ 12,475
19.30%
$ 11,311
17.50%
$ 1,163
1.80%
$
58
$ 1,228
1.90%
$
323
0.50%
$ 2,124
$ 1,186
$ 13,857
20.50%
$ 3,312
4.90%
$
162
0.24%
101
0.15%
$ 33.80
0.05%
$ 3,339
4.94%
$ 1,202
36.00%
$
(68)
$ 2,069
3.06%
$ 1,419
2.10%
65
$ 3,554
5.26%
$ 13,046
19.30%
$ 11,829
17.50%
$ 1,217
1.80%
$
53
$ 1,284
1.90%
$
338
0.50%
$ 2,216
$ 1,113
$ 14,263
20.50%
$ 3,270
4.70%
$
167
0.24%
104
0.15%
$ 34.79
0.05%
$ 3,298
4.74%
$ 1,187
36.00%
$
(70)
$ 2,041
2.93%
$ 1,426
2.05%
67
$ 3,534
5.08%
$ 13,428
19.30%
$ 12,176
17.50%
$ 1,252
1.80%
$
36
$ 1,322
1.90%
$
348
0.50%
$ 2,177
$
984
$ 14,894
20.50%
$ 3,270
4.50%
$
174
0.24%
109
0.15%
$ 36.33
0.05%
$ 3,299
4.54%
$ 1,187
36.00%
$
(73)
$ 2,038
2.81%
$ 1,453
2.00%
70
$ 3,561
4.90%
$ 14,023
19.30%
$ 12,715
17.50%
$ 1,308
1.80%
$
55
$ 1,380
1.90%
$
363
0.50%
$ 2,125
$
864
$ 15,481
20.50%
$ 3,398
4.50%
$
181
0.24%
113
0.15%
$ 37.76
0.05%
$ 3,428
4.54%
$ 1,234
36.00%
$
(76)
$ 2,119
2.81%
$ 1,510
2.00%
72
$ 3,701
4.90%
$ 14,575
19.30%
$ 13,215
17.50%
$ 1,359
1.80%
$
51
$ 1,435
1.90%
$
378
0.50%
$ 2,215
$
810
$
$
$
$
$
$
$
$
$
$
$
4,987
22.54%
724
3.27%
35
0.16%
44
0.20%
9
0.04%
706
3.19%
267
37.82%
(29)
410
1.85%
481
2.17%
27
918
4.15%
9,959
45.01%
8,438
38.14%
1,521
6.87%
(102)
342
1.55%
7
678
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
6,326
22.54%
360
1.28%
85
0.30%
31
0.11%
16.10
0.06%
398
1.42%
131
32.78%
(28)
240
0.85%
673
2.40%
21
934
3.33%
10,038
20.00%
8,784
17.50%
1,255
4.47%
(266)
436
1.55%
7
0.02%
764
725
$ 11,313
22.54%
$
1,084
2.16%
$
120
0.24%
75
0.15%
$
25.10
0.05%
$
1,104
2.20%
$
398
36.00%
$
(50)
$
656
1.31%
$
1,154
2.30%
48
$
1,859
3.70%
$ 10,038
20.00%
$
8,784
17.50%
$
1,255
2.50%
$
(368)
$
778
1.55%
$
7
0.01%
9.5
2020 E
12
Best Buy Co.
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX 3 ² DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
Assumptions for Discounted Free Cash Flows Model
Tax Rate
36.00% Terminal Growth Rate
Risk-Free Rate
3.35% Terminal Value
$
Terminal Risk-Free Rate
4.46% PV of Terminal Value
$
Beta
1.19 Sum of PV Free Cash Flows
$
Market Risk Premium
7.00% Firm Value
$
% Equity
92.70% LT Debt
$
% Debt
7.30% Cash
$
Cost of Debt
6.75% Equity Value
$
CAPM
11.71% Diluted Share Count
WACC
11.17% Implied Price
$
Terminal WACC
12.20% Current Price
$
Under (Over) Valued
3.00%
24,800
8,309
10,964
19,273
1,134
927
18,139
408
44.48
34.29
29.72%
APPENDIX 4 ² BETA SENSITIVITY ANALYSIS
Beta
0.79
0.89
0.99
1.09
1.19
1.29
1.39
1.49
1.59
St. Deviation
2.00
1.50
1.00
0.50
0.00
-­0.50
-­1.00
-­1.50
-­2.00
Implied Price Under (Over) Valued
$ 63.10
84.02%
$ 57.25
66.96%
$ 52.36
52.69%
$ 48.20
40.56%
$ 44.48
29.72%
$ 41.52
21.07%
$ 38.79
13.12%
$ 36.37
6.08%
$ 34.22
-­0.20%
APPENDIX 5 ² REVENUE MODEL
The University of Oregon Investment Group
($ in millions, except stores data)
2008
International Segment
Revenue
Stores
Revenue Per Store
Revenue Per Store Growth
Gross Margin
Domestic Segment
Revenue
Stores
Revenue Per Store
Revenue Per Store Growth
Gross Margin
Total Revenue
2009
2010
2011 Q12 A
0.5
2011 Q34 E
2011 A+E
1.5
2012 E
2.5
2013 E
3.5
2014 E
4.5
2015 E
5.5
2016 E
6.5
2017 E
7.5
2018 E
8.5
2019 E
9.5
2020 E
$ 6,695 $ 9,945 $ 12,380 $ 5,767 $ 7,209 $ 12,976 $ 14,231 $ 15,213 $ 16,476 $ 17,759 $ 18,919 $ 20,084 $ 21,214 $ 22,741 $ 24,004
343
2,835
2,835
2,815
2,830
2,830
2,935
2,960
3,010
3,090
3,150
3,200
3,250
3,350
3,400
$ 19.52 $ 3.51 $ 4.37 $ 2.05 $ 2.55 $ 4.59 $ 4.85 $ 5.14 $ 5.47 $ 5.75 $ 6.01 $ 6.28 $ 6.53 $ 6.79 $ 7.06
-­82.03%
24.48%
5.00%
5.75%
6.00%
6.50%
5.00%
4.50%
4.50%
4.00%
4.00%
4.00%
20.70%
23.90%
25.30%
$ 33,328 $ 35,070 $ 37,314 $ 16,359 $ 20,858 $ 37,217 $ 38,469 $ 39,794 $ 41,802 $ 43,672 $ 45,716 $ 47,510 $ 48,364 $ 49,915 $ 51,513
971
1,107
1,192
1,246
1,300
1,300
1,320
1,340
1,380
1,410
1,440
1,460
1,450
1,460
1,470
$ 34.32 $ 31.68 $ 31.30 $ 13.13 $ 16.04 $ 28.63 $ 29.14 $ 29.70 $ 30.29 $ 30.97 $ 31.75 $ 32.54 $ 33.35 $ 34.19 $ 35.04
-­7.70%
-­1.19%
-­8.55%
1.80%
1.90%
2.00%
2.25%
2.50%
2.50%
2.50%
2.50%
2.50%
24.50%
$ 40,023
24.60%
$ 45,015
24.20%
$ 49,694
$ 22,126
$ 28,066
$ 50,192
$ 52,700
$ 55,008
$ 58,278
$ 61,431
$ 64,635
$ 67,594
$ 69,578
$ 72,656
$ 75,517
13
Best Buy Co.
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX 6 ² HAMADA BETA
The University of Oregon Investment Group
Company
RSH
GME
DELL
AAPL
SPLS
AMZN
HP
MSFT
Beta
1.02
1.09
1.40
1.33
0.95
1.22
1.72
0.99
Mean
1.18
D/E
Standard Error
32.99%
0.23
7.30%
0.27
22.70%
0.17
0.00%
0.15
16.06%
0.15
0.20%
0.19
7.00%
0.25
2.48%
0.13
11.70%
0.20
Weight
15%
15%
10%
10%
15%
15%
10%
10%
13%
Variance
0.05
0.07
0.03
0.02
0.02
0.04
0.06
0.02
0.04
Pure Business Beta
1.18
Sample D/E
11.70%
Unlevered Business Beta
1.10
BBY D/E
0.13
BBY Beta
1.19
APPENDIX 7 ² SOURCES
x
x
x
FactSet
BBY Sec Filings
IbisWorld Research
14