Best Buy Company, Inc.

Best Buy (BBY) is a provider of technology products and services, offering services to consumers, small business owners and educators. Industry peers include Amazon.com, Apple, Inc. and Wal-Mart Stores.

Short-Term Value

My short-term (3-6 week hold) target price for the stock is $77.52, with an initial trailing stop at $74.34. Upward price movement will find resistance at $78.50, while downward price movement will find support at $73.68 and $71.03, with final support at $68.72.

The Tax Act

The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.

In the case of Best Buy Company, Inc., the company applied a blended U.S. statutory federal income tax rate of 33.7% for fiscal 2018. In addition, a provisional tax expense in fiscal 2018 of $283 million was recorded. The $283 million included a $209 million charge associated with the deemed repatriation tax and a $74 million charge related to the revaluation of deferred tax assets and liabilities to reflect the new tax rate.

Insider Transactions

In the past 12 months, the company recorded 154 insider trades involving 7,970,491 shares of stock. Of those 154 insider trades, 68 were Buys involving 1,928,388 shares of stock, and 86 were Sells involving 6,042,103 shares of stock, creating an insider buy to sell ratio of 0.3 to 1.

Acquisitions

The company made no business acquisitions during FY2018. However, management did complete the consolidation of the company’s Canadian holdings resulting in the permanent closure of 66 Future Shop stores, the conversion of 65 Future Shop stores to Best Buy stores and the elimination of the Future Shop website.

Growth and Not

There are several year over year growth metrics of interest; revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and finally year to date price growth. For Best Buy Company, Inc., revenue grew by 7%, free cash flow declined by 17%, earnings decline by 15%, debt declined by 1%, and the stock price grew by 39%. Year to date the stock price has increased 4%.

Future Value

My future (5-year hold) target price for the stock is $149.00, which is an average annual return of 20%. A prior five-year hold of the stock (FY2014- FY2018) would have returned an average of 70% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value

My baseline valuation for the stock is $46. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value for the stock is $39. The fair value number is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of an AAA-rated corporate bond. Value investing buy, sell, and close targets are derivatives of fair value.

Fair Warning

Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Best Buy Company, Inc. (NYSE: BBY) – FYE 02/2018, the stock is overvalued, trading above my most recent $62 close target. (Please See Linked PDF Worksheet)