Bank Of America Turns Bearish On Best Buy, Says Retailer Could Miss Q4 Comp Estimate

Consumer electronics retailer Best Buy Co Inc BBY remains a "very high quality company," but it faces concerning industry trends and negative product headwinds that warrant a bearish stance on the stock, according to Bank of America Merrill Lynch. 

The Analyst

Analyst Curtis Nagle downgraded Best Buy from Neutral to Underperform with a price target lowered from $70 to $50.

The Thesis

Best Buy is run by a "very strong" management team, but the reality is that industry growth continues to weaken and there is a chance the company could miss the Street's fourth-quarter comp estimate of 1.5 percent, Nagle said in the downgrade note. (See his track record here.) 

This view is based on credit and debit card data collected by BofA that shows total spending for consumer electronics and toys fell 6.3 percent in November, the first month of the fiscal quarter, the analyst said. 

Similar data has shown an average 4-percent spend growth in the first month of the prior four quarters, Nagle said. The case can be made that November trends are a "blip" ahead of a very busy December, but if sequential trends remain throughout the full quarter, Best Buy's comps would only come in at a positive 0.4 percent, he said. 

Three categories are continuing to show concerning trends at Best Buy, the analyst said:

• TVs (25 percent of sales), a segment where the company is seeing increasing competition from mass retailers.
• Gaming (8 percent of sales), due to the "waning hardware cycle."
• Apple Inc. AAPL products (10 percent of sales) given concerns related to iPhone sales growth.

Price Action

Best Buy shares were down 2.78 percent at $53.84 at the time of publication Monday. 

Related Links:

Best Buy Posts Strong Earnings Just In Time For Black Friday: The Sell-Side Reacts

Morgan Stanley: Why Retailers Should Continue To Worry About 'The Amazon Effect'

Photo by Ivan Oyarzun/Wikimedia.