Never catch a falling knife. The oft-used phrase helps investors avoid stocks that are in a death spiral. Best Buy's (NYSE:BBY) share price has been in a downward direction since the end of 2009, losing 35.6% of its value in the last 20 months. Many question its big box format in an online world, suggesting its best days are behind it. We'll see. I believe Best Buy's epitaph is very premature. In fact, trading near its 52-week low and 75% below its five-year high of $100.66, Best Buy is looking more and more like its name implies. (For more on value investing, check out Finding Value In A Sideways Market.)
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Historical Perspective
In the past 11 years, Best Buy's stock has declined four times: 2002, 2008, 2010 and 2011. We can throw out 2008 because every stock had a bad year. In 2010, the wheels started to fall off the cart leading to an 11.6% decline followed by a 26% drop so far in 2011. Barron's wrote in June that several things including declining same-store sales, lower operating margins, increased competition from the likes of Amazon.com (Nasdaq:AMZN) and Wal-Mart (NYSE:WMT) and consumers passing on flat-screen TVs and other big-ticket items has led to zero interest in its stock, which was trading around $30 at the time of the article. I'd be curious to know their thoughts now that it's around $24.

This leaves me with 2002. It lost 51.1% of its value that year, 29 percentage points worse than the S&P 500, its worst performance relative to the index in the past 11 years. Best Buy's operating performance in fiscal 2002 was identical to today in terms of gross margin while operating margins were 70 basis points higher at 4.8% and revenues were $19.6 billion, 61% less than the trailing 12-months. It made a little more profit from a lot less revenue. For that, its average P/E during 2002 was 13.9 or 71% of the S&P 500 at 19.7. Flash forward to today and its P/E is 78.2 or 54% of the S&P 500 at 14.6. While the index P/E has shrunk by 26%, Best Buy's has dropped by 43%. It hardly seems fair considering both year's results were very similar and since then it's bought back 89 million of its shares. Something's out of whack and I doubt it's the S&P 500.

International Expansion
Best Buy brought its big-box concept to China in 2003, three years ahead of Home Depot (NYSE:HD). In 2006, it bought 75% of the homegrown Five Star chain for $184 million and then the remaining 25% three years later for $185 million. It's a good thing too because its own concept wasn't cutting it. In February, it announced it was shuttering all nine stores to focus on Five Star, a chain that's well known in China and has been around much longer. Opening 40 to 50 stores annually, Five Star will become a very important component of its international business. In the first quarter ended May 28, the international segment's comparable store sales grew 0.4% year-over-year thanks to Five Star. The growth from its Chinese operations also led to a 220% increase in the international segments' operating income. Although the operating margin was just 1.5% or half its domestic return, the margin itself grew by 200% year-over-year. In a year or two, I wouldn't be surprised if both revenues and operating profits in its international segment were higher than in the U.S. That's a very good thing.

Domestic Focus
As detailed back in February, it is focusing its U.S. efforts on its Best Buy Mobile stores, which cater to smartphones and possess a smaller footprint. In the first quarter, domestic same-store sales for mobile phones increased 28% in the first quarter. It's clearly Best Buy's biggest revenue generator these days and a big reason why it's opening 150 new locations. Also helping on the domestic front is its online business, which grew 12% in the quarter. In 2010, its online sales were $2.5 billion or 5% of overall revenue. If it can push this number into double-digits within a few years, it'll make a big difference to profits.

The Bottom Line
I see Best Buy holding the line on earnings moving forward and perhaps even expanding them in 2012 or 2013. History seems to suggest that picking up its stock at current prices is a good buy. Should the shares drop below $20, it becomes the best buy. (For more on value investing, see Value Investing + Relative Strength = Higher Returns.)

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