Why BofA Is Bullish On Best Buy, Bearish On Sleep Number

BofA Securities analysts revisited their prior stance on the retail sector and presented a pair trade Thursday: bullish on electronics retailer Best Buy Co Inc BBY and bearish on bed manufacturer and retailer Sleep Number Corp SNBR.

The Best Buy, Sleep Number Analyst: Curtis Nagle upgraded Best Buy's stock rating from Neutral to Buy with an unchanged $132 price target.

The analyst also downgraded Sleep Number's stock rating from Neutral to Underperform with a price target lifted from $73 to $88.

The Best Buy Thesis: Best Buy is one of the "highest quality" names in the retail space, and a bullish stance can now be justified for three reasons, Nagle said in a Thursday upgrade note.

They are:

1) Best Buy should emerge from the COVID-19 pandemic in a stronger and more profitable position.

2) The company has a path for sustainable growth in multiple segments while it faces easy comparison in the coming quarters.

3) Shares are attractive at just 14 times 2021E EPS.

Best Buy also entered 2021 with record-high levels of cash, very low leverage and lots of room for capital returns, the analyst said. 

"It is worth noting that BBY has one of the strongest beat and raise track records in retail and we see no reason why this shouldn't continue," he said. "BBY tends to guide conservatively which can pose a risk to shares on the day, but over the medium to long term, this has not been material to the share price."

Related Link: Benzinga's Top Ratings Upgrades, Downgrades For February 4, 2021

The Sleep Number Thesis: Investors should turn bearish on Sleep Number's stock after the "significant" increase in the stock to the point where the valuation is now "well ahead" of its historic average, Nagle said in the downgrade note. 

While the company could see some industry-driven momentum in 2021, a premium multiple versus Tempur Sealy International Inc TPX is "not warranted," the analyst said.

Specifically, Sleep Number's stock is trading at 21 times 2021E EPS versus a three-year average of 16 times, he said.

Sleep Number's stock also trades at a three-turn premium to Tempur Sealy's stock, which trades at 18 times 2021 earnings, according to BofA.

BBY, SNBR Price Action: Shares of Best Buy were trading higher by 3.56% at $114.25 at last check, while Sleep Number's stock was lower by 3.03% at $110.02. 

Photo: Chasity Cortijo via Unsplash.