Why Best Buy Looks Attractive and Eddie Lampert Should Buy Circuit City

It’s rare for me to like several competitors’ stocks all at the same time. However, fears of a slowing economy, housing meltdown, and higher inflation have really hurt the consumer discretionary sector so far this year. In fact, it is one of the worst performing groups along with financial services.

Is it silly for me to praise three electronics retailers in such an environment? Some people will absolutely think so, but let me explain why I think they can all be owned. I’ve written about RadioShack (RSH) a lot since January, so I’ll spare you from reading more about them. Do a site search from the sidebar if you need a refresher.

As you may have seen, Best Buy (BBY) shares were hit hard after releasing poor results for their fiscal first quarter. Product mix was the main culprit, pushing down gross margins for the quarter, but the company expects a rebound later in the year. Best Buy also is accelerating their expansion plans in China.

Most people, myself included, believe BBY to be the creme of the crop in the consumer electronics space. Granted, that might not be saying much when you compete with RSH and Circuit City (CC), but I truly believe Best Buy’s success has a lot to do with a good management team that knows what they are doing. Personally, I love shopping there and whenever I get the urge to treat myself to some discretionary spending, it’s one of my top destinations.

What makes the stock attractive right now? Very simply, valuation. The shares are sitting near multi-year lows and look very cheap on a P/E to growth rate basis. Earnings guidance for this year was cut to $3.05 from $3.18 per share. At the current price of $44 and change, BBY trades at 14.6 times this year’s estimates. Given their leadership position in the industry, a below-market multiple, a stellar balance sheet ($5 in net cash per share to use for buybacks), and a double-digit earnings growth rate going forward, shares of Best Buy appear to be attractively priced. Assume 15% earnings growth in 2008 and a market multiple and you can justify a $56 price tag sometime next year.

The situation at Circuit City is a lot uglier. This company has been trying to find a way to get back on firm footing and stay there for a long time. Every so often they appear to be making progress but then falter and change strategies. The same thing is happening now. The stock has been cut in half over the last year, to $15 and change. Why is the stock attractive? I really don’t think it can go much lower and there are some catalysts that could push it back into the 20’s.

If the latest round of restructuring doesn’t work, I really think Circuit City will be sold. There have been interested parties in the past, but the company has resisted. Personally, I think a buyout is the best way for them to turn things around. I would love to see Eddie Lampert buy Circuit City. It looks like his kind of thing, namely a brand name and a bunch of customers, but no consistent profitability.

The stock is really cheap, one of the cheapest well-known retailers I can find. While profits are sporadic, if existent at all, the company trades for 0.2 times sales and has $2 of net cash on the balance sheet. A market cap of $2.7 billion with no leverage issues and nearly $13 billion in annual revenue is about as low as the stock can get, in my view.

If the turnaround works, the stock sees the twenties. If they finally agree to sell to someone who is willing to make dramatic moves to turn things around, the same thing happens. At $15 and change I just think the stock is pretty much near rock bottom. The risk reward is very favorable even if the company’s results have not been as of late.

So, I’m surprised to be saying this, but I think all three of these electronics retailers can be owned. If you are looking for places to reallocate some RadioShack profits, look no further than their competitors.

Full Disclosure: Long Best Buy and RadioShack at the time of writing