JPMorgan Downgrades Best Buy On Slow Sales, Stock Volatility

In a report published Friday, JPMorgan analysts downgraded the rating on Best Buy Co Inc BBY from Overweight to Neutral, while reducing the price target from $45 to $40. The analysts believe that a lackluster start to the year for sales could result in uncertainty regarding whether sales would pick up significantly in the latter half. This is likely to "keep a lid on the stock's valuation until there is greater clarity," especially since 57 percent of earnings is generated in 4Q. "…going forward operating income growth is more dependent on the topline/gross profit dollar expansion and BBY is lapping significant gross margin recapture in the back half while the benefits from its Renew Blue cost reduction program are expected to be lower YOY," the analysts said. These factors create the possibility of downward revisions or "margin-driven upside being reinvested into lower back half forecasts." Moreover, the retail sector is crowded and the summer period has been "historically weak" for retail stocks. The domestic comp estimates for 2015 and 2016 has been reduced from 0.9 percent to 0.3 percent and from 1.7 percent to 1.1 percent, respectively. The EPS estimates for 2015 and 2016 have been reduced from $2.46 to $2.45 and from $2.81 to $2.79, respectively.