Why You Should Have Bought Best Buy's Stock Instead Of Windows 95

BBY

FUNDAMENTAL ANALYSIS:

As mentioned above, by 1997 Best Buy had a decade of excellence under its belt. In both, the stock price appreciation and the growth of its retail business. Between 1986 and 1997 the company’s stock price had already appreciated by 1,900% (a 19 Bagger). Yet, things were about to get a whole lot better for Best Buy and the company’s shareholders.

To establish a clear picture of what had happened between 1997 and 2006 must first study the fundamental growth of the company at the time.

Key Statistics	1997(December 31, 1997)	2006(December 31, 2006)
Price Per Share	$4.05	$50.00
Market Cap	$1.4 Billion	$17.4 Billion
Earnings Per Share	$0.27	$4.02
P/E Ratio	14.8	12.42
Price/Sales Ratio	0.17	0.48
Price/Book Ratio	2.5	2.8
Revenue	$8.3 Billion	$ 36 Billion
Net Income	$94.5 Million	$1.4 Billion
Annual Earnings Growth	26%(gross profit)	21%
Total Cash	$520 Million	$1.2 Billion
Total Debt	$225 Million	$590 Million
Book Value Per Share	$1.60	$17.8
Shares Outstanding	348 Million (split adjusted)	348 Million
Total Assets	$2 Billion	$13.5 Billion
Shareholder Equity	$558 Million	$6.2 Billion

As we analyze the data above, one thing becomes evident. Best Buy’s fundamental growth during the time did NOT match the growth in the company’s share price. While the Best Buy’s stock price appreciated 4,000%, shareholder equity and book value grew by only 1000%, net income and earnings per share grew by 1,380% and the revenue base increased by only 333%. While an admirable performance, the numbers above do not justify the rise in the stock price from the fundamental perspective alone.

We must now go back and study the 1996-2007 period in greater detail in order to determine why the company was selling at such a discounted level and what fundamental changes would occur to propel the stock price higher.

In 1995 the company began enhancing its store format into the so called “Concept III”. The concept featured a larger redesigned store format created to produce a more informative and exciting shopping experience for customers. The standard size of the Concept III stores was increased to 45,000 square feet and it was intended to be as good as or better than the selections offered by Best Buy’s competitors in each of its principal product categories. In other words, Best Buy was starting to focus more on hands on demonstrations, bigger stores and providing customers with the most desirable shopping experience possible.