Earnings

A Side-by-side Analysis of Best Buy Co., Inc. (BBY) and GameStop Corp. (GME)

Best Buy Co., Inc. (NYSE:BBY) shares are up more than 45.25% this year and recently decreased -0.77% or -$0.48 to settle at $61.50. GameStop Corp. (NYSE:GME), on the other hand, is down -23.71% year to date as of 12/05/2017. It currently trades at $19.08 and has returned 1.31% during the past week.

Best Buy Co., Inc. (NYSE:BBY) and GameStop Corp. (NYSE:GME) are the two most active stocks in the Electronics Stores industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect BBY to grow earnings at a 14.38% annual rate over the next 5 years. Comparatively, GME is expected to grow at a 12.00% annual rate. All else equal, BBY’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 7.69% for GameStop Corp. (GME). BBY’s ROI is 20.50% while GME has a ROI of 13.20%. The interpretation is that BBY’s business generates a higher return on investment than GME’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. BBY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.71. Comparatively, GME’s free cash flow per share was -. On a percent-of-sales basis, BBY’s free cash flow was 0.53% while GME converted 0% of its revenues into cash flow. This means that, for a given level of sales, BBY is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. BBY has a current ratio of 1.40 compared to 1.30 for GME. This means that BBY can more easily cover its most immediate liabilities over the next twelve months. BBY’s debt-to-equity ratio is 0.31 versus a D/E of 0.00 for GME. BBY is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

BBY trades at a forward P/E of 14.56, a P/B of 4.34, and a P/S of 0.45, compared to a forward P/E of 5.90, a P/B of 0.85, and a P/S of 0.23 for GME. BBY is the expensive of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. BBY is currently priced at a 3.21% to its one-year price target of 59.59. Comparatively, GME is -8.93% relative to its price target of 20.95. This suggests that GME is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for BBY and 2.60 for GME, which implies that analysts are more bullish on the outlook for BBY.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. BBY has a beta of 1.39 and GME’s beta is 1.29. GME’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. BBY has a short ratio of 7.83 compared to a short interest of 10.44 for GME. This implies that the market is currently less bearish on the outlook for BBY.

Summary

GameStop Corp. (NYSE:GME) beats Best Buy Co., Inc. (NYSE:BBY) on a total of 8 of the 14 factors compared between the two stocks. GME is growing fastly and has lower financial risk. In terms of valuation, GME is the cheaper of the two stocks on an earnings, book value and sales basis, GME is more undervalued relative to its price target. Finally, LGF-A has better sentiment signals based on short interest.

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