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David Einhorn Thinks Best Buy (BBY) is a 'Best Buy'

May 2, 2011 10:21 AM EDT
In a letter to investors, hedge fund manager David Einhorn of Greenlight Capital disclosed a new position in electronics-retailer Best Buy (NYSE: BBY).

Einhorn said while the market is concerned the company has reached its growth limits in the U.S., he believes much of the company's recent problems were due to last year being a soft-goods holiday season that was particularly poor for televisions.

"Bears believe that the internet puts BBY on a path to Blockbuster-video obsolescence. We think that view overstates the risk as there is value in store help, merchandising, service and being able to walk out of the store with your purchase," Einhorn said.

While the company's "big box" stores in the U.S. are mature, Einhorn said the company can more than offset this with growth of its Best Buy Mobile concept, international retail business and through additional higher-margin services offerings. In addition, the company has minimal leverage and, between earnings and working capital improvements, should generate almost a 20% free cash flow yield this year. Best Buy is also targeting $1.3 billion in share repurchase this year, or approx. 10% of its current market valuation.

His fund established the position in Best Buy at a average price of $33.33, or about 10x 2011 EPS estimates and 8x 2012. So far this is a losing bet for Einhorn, with shares last trading at $31.58.


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