BofA Downgrades Best Buy To Underperform, Sees Consensus Estimates 'At Risk'

In a report published Friday, BofA Merrill Lynch analyst Denise Chai downgraded the rating on Best Buy Co Inc BBY from Buy to Underperform, while reducing the price objective from $45 to $32.

Analyst Denise Chai said that the downgrade was based on:

1. Possible comp downside in the back half of the year due to a mixed product cycle
2. Significant cost cutting efforts being offset by continued reinvestment in the business
3. Limited catalysts to expand the multiple

“We believe BBY will continue to increase capital return and perform well relative to the industry, but if 2H comps are negative, as we forecast, shares and the multiple are at risk,” Chai mentioned.

In the report BofA Merrill Lynch noted, “Over the past three years under CEO Hubert Joly and CFO Sharon McCollam, BBY has significantly strengthened its competitive position through investments in the store experience, omni-channel and tighter relationships with vendors. BBY is also benefitting from strong product cycles in 4K TV’s and appliances.”

Chai added, however, that “increasing weakness in computing, ongoing commodization and pricing pressure within tablets and stagnant mobile trends” were likely to exert pressure on the company’s comps.

While saying that the 2Q guidance appeared to be “conservative,” BofA Merrill Lynch reduced the estimates to reflect a downward revision in comps in 2H15, from 1.5 percent to -1 percent, and in 2016/17, from 1 percent to 0.5 percent, as well as less SG&A leverage.

The EPS estimates for 2016, 2017 and 2018 have been reduce from $2.62 to $2.45, from $3.18 to $2.75 and from $3.50 to $3.00, respectively.

“According to BofAML technical analyst Stephen Suttmeier, BBY faces resistance at $39-41 and support at $32-33,” the report stated.