Best Buy (NYSE:BBY) appears to be undervalued given expected future earnings, but it's not time to declare it the winner among electronics retailers just yet. First, we'll compare Best Buy's cash management with major competitors RadioShack (NYSE:RSH), HH Gregg (NYSE:HGG) and Conn's (Nasdaq:CONN) as well as Amazon.com (Nasdaq:AMZN) and Wal-Mart (NYSE:WMT). If its cash flow and balance sheet stack up against those of the competition, I'll gladly crown it cash management champion. (To read the original articles, please refer to Best Buy: Still The Best Electronics Retailer?)
IN PICTURES: Break Into Forex In 12 Steps

Average Cash Return On Invested Capital (CROIC) - Last Three Fiscal Years

Company Market Cap

Average CROIC

Best Buy (NYSE:BBY) $15.9 Billion 14.2%
Radio Shack (NYSE:RSH) $2.5 Billion 19.7%
HH Gregg (NYSE:HGG) $786.8 Million 11.8%
Conn\'s (Nasdaq:CONN) $142.6 Million -6.6%
Amazon.com (Nasdaq:AMZN) $54.8 Billion 35.8%
Wal-Mart (NYSE:WMT) $201.6 Billion 6.8%

Radio Shack Lives
It's hard to believe that Radio Shack is still around but it is and if its average cash return on invested capital is any indication, it will be around for many years to come. The Shack, as the company's branding itself in ads these days, actually had a higher return than Best Buy in each of the last three fiscal years. That's difficult to comprehend until you consider the two chains' sizes, or more precisely, the difference in their sizes. Radio Shack's total revenues in fiscal 2008 (December year-end) were $4.22 billion, less than a one-tenth of Best Buy's $45.02 billion in its latest fiscal year ended February 28, 2009. Best Buy's operating margin on those sales is 4.2% versus 7.6% for Radio Shack. While Best Buy's shares are currently trading at a reasonable 14.5 times earnings, Radio Shack's trade at a downright bargain of 13 times earnings. Most importantly, Radio Shack's net current asset value per share is $9.95, whereas Best Buy's is $0.8057 per share. Essentially, Radio Shack appears to be a safer company in terms of current per share liquidity requirements.

Biggest Disappointment
The hardest thing for long-time Best Buy to accept should be the way management has handled its cash in the past two fiscal years. Two events specifically call into question the timing of management's actions. First, it repurchased 9.8 million shares in fiscal 2008 at a price of around $47 per share for a total of $461 million. I have nothing against share repurchases, but when a company seriously overpays - the shares have since fallen by approximately 12% - I have to wonder how well served shareholders are by such a move, especially when you consider that the company could have purchased those same shares for significantly less by waiting a couple of years. Best Buy's stock was trading close to its all-time high for most of 2007 shortly before the repurchases took place. Surely dividend payments made more sense given its valuation.

Bottom Line
Not only am I unconvinced that Best Buy knows what it's doing from a cash flow point of view, but also that it stands a clear second to its once-cheesy rival in terms of investment potential. Radio Shack is the undervalued electronics retail stock in my opinion. Investors should take a closer look. (To learn about how the value of a company can differ from the value of its pieces, check out Use Breakup Value to Find Undervalued Companies.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center