In a note Monday, UBS analysts boosted their rating on Best Buy (NYSE:BBY) to Buy from Neutral, raising the price target to $106 from $85 per share.
Citing several factors that could lead to outperformance, the report highlights a compelling risk-reward proposition for investors.
"Over the next 18 months, we see several drivers of potential upside," the analysts state.
These include an improving housing market (positively correlated with appliance sales), a looming electronics replacement cycle, and rising adoption of AI-powered devices, which UBS estimates could boost sales by an average of 2 percentage points. Additionally, the expansion into new product categories like e-bikes and furniture presents further growth opportunities.
UBS anticipates these factors to culminate in a "nice recovery" for Best Buy's sales in the latter half of 2024 and into 2025. They emphasize Best Buy's historical strength in capturing market share during the early stages of product cycles.
The report also credits Best Buy's restructuring efforts for improving its earnings potential. The analysts note a significant reduction in staffing levels per store, translating to higher earnings torque as sales improve.
The bank explains that even with a slight increase in staffing, a 3% rise in comparable sales next year could drive EPS to $7.30, exceeding current consensus estimates of $6.70.
Beyond these growth catalysts, UBS highlights Best Buy's attractive valuation. The current dividend yield of 4.3%, a 30% discount to the S&P 500, and a strong cash position offer significant downside support, according to the report. "We think the stock is pricing in earnings that are below BBY's potential," they state.
While acknowledging potential risks like category-specific sales weakness or a broader economic downturn, UBS maintains a bullish outlook. This revised target reflects optimism about Best's Buy accelerating sales and margin growth over the coming year.
In conclusion, UBS analysts view Best Buy as an attractive opportunity with "multiple paths to upside potential."