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Dwindling Cash Flow at Best Buy (BBY) Has Some Analysts Questioning Takeover Interest

November 21, 2012 11:27 AM EST
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Price: $82.03 +0.20%

Rating Summary:
    11 Buy, 19 Hold, 5 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 13 | Down: 11 | New: 11
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Best Buy (NYSE: BBY) is seeing further pressure Wednesday following third-quarter results issued Tuesday morning. One interesting item is creeping up amid the retailer sinking to fresh decade lows: will founder Schulze still bite?

Analysts are mixed. Wedbush thinks the declining free cash flow (FCF) would make it less attractive to private equity firms while Raymond James comments that, other than pure valuation, it isn't sure what makes Best Buy an attractive buyout candidate. Wedbush cut its price target from $14.50 down to $9.

Deutsche Bank also aired some concern. The firm alluded to the 30 percent drop in FCF and, while not indicative of holiday trends, thinks "that this type of decline in cash flow guidance and profitability heading into the holidays will likely cause a higher level of scrutiny among private equity partners." Either the deal won't get done, or the price tag is coming down, Deutsche noted. The firm has a Hold rating on Best Buy, cutting its price target $3 to $13.

Janney lowered its price target from $24 down to $18 and maintained a Buy rating. The firm sees Best Buy lower as consumers waited for new products to roll out, like Microsoft's (Nasdaq: MSFT) Windows 8 platform and Apple's (Nasdaq: AAPL) new iPad Mini and iPad 4. The firm is a buyer through calendar Q412.

KeyBanc is also taking a positive stance on two key arguments: 1) CEO Hubert Joly revealed some promising initiatives at Best Buy's analyst day, though costs to implement the moves are still in question, and 2) that founder and 20% shareholder Dick Schulze will continue to pursue takeout opportunities with private equity firms. KeyBanc has Best Buy at Hold. The firm has EPS estimates of 2.58 and $2.45 for FY12 and FY13, which are 4.7 times and 4.9 times current trading levels. Valuation compares with the median 10.1 times earnings Best Buy traded at over the last five years.

Goldman Sachs noted heavier inventories at Best Buy along with the irony that the two executives which spoke the most on the Company's conference call will be leaving at year end. Goldman sees fresh blood entering the ranks as a positive, though there will be a learning curve. The firm does not have a rating on Best Buy.

Best Buy shares are down about 3 percent Wednesday and nearly 16 percent on the week.


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