KeyBanc Initiates hhgregg (HGG) with a Buy

August 5, 2008 9:34 AM EDT

KeyBanc initiates coverage on hhgregg (NYSE: HGG) with a Buy rating and a $13 price target.

The firm believes that the company's focused product assortment, strong customer service, and newness of its stores relative to its competition presents a competitive advantage. KeyBanc also believes that the company can operate 400 stores in the US over the long-term and can sustain 15-18% unit growth for the next 10 years. Furthermore, the firm expects HHG to gain market share in the television and appliance categories at the expense of Circuit City and Sears.

The firm highlights that the company has a history of being profitable and free cash flow-positive. Over the long-term, they believe that "operating margins should be relatively sustainable" while the company uses its expected positive free cash flow to fund growth and reduce debt. Overall, the result is an expected EPS growth rate of 17-20% over a three- to five-year horizon.

In conclusion, the firm said, "With the P/E at a significant discount relative to other high-growth retailers, we believe the shares offer a compelling value, as we foresee the potential for strong earnings growth and P/E multiple expansion as the Company proves the ability to execute on its growth plans."

hhgregg, Inc. is a specialty retailer of consumer electronics, home appliances and related services operating under the names hhgregg and Fine Lines.

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