Best Buy Stock Gains 4% Following UBS Upgrade

Best Buy (NYSE: BBY) saw its shares climb over 4% yesterday following an upgrade from UBS analysts, who raised the company's rating from Neutral to Buy and increased the price target from $85 to $106.

The analysts identified several factors contributing to potential outperformance and an appealing risk-reward scenario for investors. They foresee multiple drivers for upside over the next 18 months, including a recovering housing market, an impending electronics replacement cycle, and the growing adoption of AI-powered devices, which could increase sales by approximately 2%. Additionally, Best Buy's venture into new product categories such as e-bikes and furniture presents further growth prospects.

UBS predicts these elements will lead to a notable recovery in Best Buy's sales in late 2024 and into 2025. The report emphasizes Best Buy's historical success in capturing market share during the early stages of product cycles.

The company's restructuring efforts are also credited with enhancing its earnings potential. Analysts note that reduced staffing levels per store have improved earnings potential as sales rise. Even with a modest increase in staffing, a 3% growth in comparable sales next year could push EPS to $7.30, exceeding the current consensus estimate of $6.70.

Furthermore, UBS highlighted Best Buy's attractive valuation, including a 4.3% dividend yield and a strong cash position, providing substantial downside protection. The analysts believe the current stock price underestimates Best Buy's earnings potential.

Despite acknowledging risks such as category-specific sales weakness or a broader economic downturn, UBS maintains a positive outlook.