The TV Trend That's Good News For Best Buy

• Best Buy Co., Inc. BBY has seen a surge of more than 22 percent in its share price over the past one month.
• Deutsche Bank’s Mike Baker has maintained a Buy rating and price target of $42 on Best Buy.
• Best Buy has one of the strongest balance sheets in Deutsche Bank’s coverage universe, which is expected to drive long term EPS growth at 12 percent.

The company has also been witnessing positive TV trends, with adoption of UHD TVs driving “both larger sets and higher price per inch,” Baker stated.

According to the Deutsche Bank report, while pricing has come into parity with that of Amazon.com, Inc. AMZN over the past 18 months, the quality of televisions being sold at Best Buy has also improved.

In addition, price per inch has also increased materially since 2011, with consumers adopting higher end televisions. With the prices of 4K/UHD TVs falling in recent times, there has been increased adoption of higher end televisions. This in turn has led to an increase in the total average selling price for TVs at the company, driving positive comps.

“As prices come down, margins naturally fall, but we think that even with this price compression, higher end televisions remain a higher margin sale for BBY, particularly when including add on sales,” the report explained.

Baker also believes that the company’s “underappreciated product cycle” has driven positive comps for four consecutive quarters. Best Buy’s consumer electronics category, which accounts for 35 percent of the company’s annual sales, has seen positive comps for the past five quarters, following 16 successive quarters of decline.

Given that flat panel TVs account for about 65 percent of the consumer electronics sales or 22 percent of total sales, the “think increased adoption of higher end flat panel television is the driving force behind this upswing and is an underappreciated product cycle for Best Buy,” Baker added.