Thursday, November 15, 2012

Two Similiar Retailers, Two Different Stories: Best Buy vs. Circuit City

Trying to pick a winner in today's market can be a complicated task. Many things need to be considered and taken into account before making an investment decision. One of the most important of these factors is the competitive landscape. It cannot be ignored no matter how great an investment a stock looks.
Lets compare two electronics retailers, Best Buy (BBY) and Circuit City (CC).

Best buys trailing PE is 16 and the price to earnings growth (PEG) is rather low at .98. Circuit City is in the red. Circuit City has grown revenues since 2004 but were only profitable in 2005 and 2006.

What Is Really Important
One of the best indicators of a successful company is when management can grow shareholder equity year over year. Circuit City has had declining shareholder equity over the last 3 years while Best Buy has compounded shareholder equity at over 30% annually from 2003 to 2006.

Key Comparison
Best Buy vs Circuit City

inventory turnover 6.6, 5
return on equity 30% , -8.36

The important thing to take away from this is Circuit City is taking longer to sell items on its shelves and hurting as a result due to its low inventory turnover.

Competitive Landscape
Compared to its rivals like Circuit City and Radioshack, Best Buy is doing fantastic. When you are a retail company and your competitor fires its most loyal, best floor employees your in a good spot. Best Buy was in this position earlier this year when Circuit City layed off thousands of its highest paid employees in an effort to reduce costs.

The Bottom Line
Best Buy is better than its competition and is attractively priced. An argument against Best Buy says Walmart,Sam's Club,Costco have more buying power and can sell cheaper electronics. It is a valid point but it isn't comparing grapefruit to grapefruit. Those stores aren't one stop, all your electronics needs destinations. Even if they have the lower prices on a handful of merchandise Best Buy has competitive advantages like The Geek Squad and managements ability to change in response to customers needs. Management has proven to be innovative. Furthermore, they are putting in Apple mini stores in a handful of Best Buy's. Best Buy's valuation and future outlook are strong. More importantly the competitive landscape has swayed in its favor. In conclusion, the smart investors choice is to go long Best Buy (BBY) and short Circuit City (CC).

This article is for the contest. It typically isn't my intention to take short positions in stocks, especially when there is a possiblitiy of a buyout or small turnaround as there may be in Circuit City.

Best Buy against Circuit City Contest Update

full disclosure: author has no position in BBY or CC

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