Morgan Stanley Defends Best Buy Following Quarterly Results

Shares of

were trading lower by around six percent Tuesday following the company's second quarter results which were released prior to market open. “Best Buy's stock reaction this morning suggests that the market has come to expect EPS beats from President and CEO Hubert Joly and EVP, CAO and CFO Sharon McCollam,”

of Morgan Stanley wrote in a mid-day note on Tuesday. “While that view may overlook the solid underlying progress the company is making (EBIT margin expanded ~ 70 basis points in the second quarter), the ingredient that is noticeably absent is healthier top-line growth. Domestic comps declined two percent while overall comps fell 2.7 percent.” While the top-line outcome was in line with estimates, the market may have been anticipating more, Gutman states. However, Best Buy's guidance for negative low-single-digit comps “may dash hopes for a near-term pickup” during the all-important holiday season. Gutman further notes that Best Buy's initiatives to gain market share is difficult given the lackluster growth in the overall market. Nevertheless, Best Buy could benefit from a modest product cycle including the rising adoption of 4K televisions and the highly anticipated launch of the iPhone 6 in the third quarter. As Best Buy continues to realize savings from its Renew Blue initiative, Best Buy is set up to generate significant operating leverage when comps turn positives. “The drivers mentioned above along with Best Buy's growing omni-channel capabilities (open box merchandise available online via ship from store), point to an imminent top-line inflection and we would take advantage of any near-term weakness,” Gutman wrote. Bottom line, Best Buy is one of the most attractively valued “category killers” according to Gutman and shares have a “compelling” risk to reward profile. Shares are Overweight rated with a $36 price target.