Apple Earnings Are A Positive Read Through For Best Buy

Following Apple Inc. AAPL's fiscal year third-quarter results, Deutsche Bank said it views the accelerating iPhone unit and dollar trends and better-than-expected Americas revenues as a favorable read through for Best Buy Co Inc BBY.

Analyst Mike Baker noted that iPhone trends are more correlated with Best Buy's results, with a correlation of 51 percent. The firm estimates that Apple accounts for a mid- to high-teen percent of Best Buy's sales, going by the latter's disclosure that its top five vendors account for 53 percent of sales. The analyst indicated that Apple figured at the top of Best Buy vendor list.

On Apple's metrics, the firm noted that iPhone unit shipments rose 1.6 percent compared to the consensus estimate of 1.5 percent and 0.8 percent growth in the second quarter. Although iPhone revenues rose a less-than-expected 3.3 percent, it represented an acceleration from the 1.2 percent growth in the previous quarter.

Apple's North American revenues climbed a solid 13 percent, notably more than the 2.8 percent growth estimated by analysts and the 10.8 percent growth in the previous quarter.

Industry Data Suggests A Comp Beat

Deutsche Bank also referred to the electronics and appliances stores sales component of the U.S. retail sales data released by the Commerce Department, which rose 1.3 percent through June, marking the first two months of Best Buy's second quarter.

At this pace, the firm feels industry data for electronics and appliances store sales would accelerate notably from the 2.6 percent drop in the first quarter and could even post a positive growth, the first for this dataset since the second quarter of 2015.

The firm clarified that historically, Best Buy's comps have correlated well with the industry data, with the company outpacing the industry growth by about 500-basis-point percentage over the past four quarters.

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Accordingly, the firm expects a comp beat by Best Buy, relative to the consensus domestic comp estimate of 2 percent for the second quarter. Specifically, the firm expects second quarter comps of 2 percent, in line with the consensus and the guidance of 1.5–2 percent.

Although comps are likely to be the focus, the firm said the market is expecting upside not only to the second-quarter earnings per share and implied margin guidance but also an increase in the full year.

Guidance Increase Warranted

Deutsche Bank noted that the second-quarter guidance implied margins up less than 10 basis points, at the mid-point and a 1–9 percent drop in operating profit dollars. Meanwhile, the consensus forecasts are at or above the high-end of the plan, the firm added.

The implied guidance for the second-half profit growth, according to the firm, is 0–5 percent in dollars or down 3 percent to up 1 percent in dollars, adjusting for an extra week. This would mark a marked deceleration from the 25-percent growth in the first quarter and the expected increase for the second quarter.

Therefore, the firm thinks the guidance should be increased in order to not disappoint the market.

As such, Deutsche Bank has a Hold rating and a $60 price target for the shares of Best Buy.

At time of writing, Best Buy shares were down 1.92 percent at $58.34. _________ Image Credit: By Miosotis Jade (Own work) [CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons