Best Buy's stock leaps after UBS makes Wall Street's most bullish call

By Tomi Kilgore

Analyst Michael Lasser lists 'multiple' drivers to boost Best Buy's stock, including new AI products and improving housing trends

Shares of Best Buy Inc. now appear "fully charged" for a rally, said UBS's Micheal Lasser, who on Monday became Wall Street's most bullish analyst covering the consumer electronics and appliances retailer.

Given "multiple paths" for potential upside for the stock and a limited downside, given the valuation discount and relatively high dividend yield, Lasser believes the stock now offers a "compelling risk-reward" profile for new investors.

The stock (BBY) climbed 3.3% in morning trading, to put it on track for the highest close since February 2023.

Lasser raised his rating on the stock to buy, after being at neutral for at least the past three years. He raised his price target to $106 from $85.

The new target, which implies 18% upside from current levels, is now the highest of the 30 analysts surveyed by FactSet who cover Best Buy.

Lasser listed several drivers of potential upside for the stock over the next 18 months:

Improving housing trends, since Lasser said there is an approximate 85% correlation between appliance sales and housing trends. The company booked $1.15 billion in revenue from appliances in the quarter to May 4, or 13% of total revenue.A pending electronics-replacement cycle. Consumers typically replace their electronics with newer models every four to seven years.Higher levels of product innovation, including those with features using artificial intelligence, should drive demand for new electronic products. For example, Apple's new Apple Intelligence will only be able to run on iPhone 15 Pro and Pro Max devices, and on some of the new models expected in the fall, so consumers may choose to upgrade to new iPhones earlier than usual.Best Buy should benefit from growing sales of new product categories, including e-bikes and furniture.

While those are upside drivers, here's what Lasser thinks will limit the downside:

Best Buy's stock has a 4.17% dividend yield at current stock prices, which is more than triple the implied yields for the SPDR S&P Retail ETF XRT and the S&P 500 index SPX.Best Buy's stock is trading at a large discount to the S&P 500. Based on FactSet data, the ratio of Best Buy's stock price to earnings estimates for the next 12 months is 13.8, compared with the P/E NTM for the S&P 500 of 21.06. "We think the stock is pricing in earnings that are below [Best Buy's] potential," Lasser wrote.Solid balance sheet. The company had cash and cash equivalents of $1.21 billion as of May 4, or about $5.63 in cash per share. Just for reference, Walmart Inc. WMT had $9.41 billion in cash and cash equivalents as of April 30, or $1.17 in cash per share.

"Our view is that Best Buy shares offer a compelling risk-reward skew, so we recommend a buy rating on [Best Buy's stock]," Lasser wrote in a note to clients.

The stock has gained 12.9% over the past 12 months, while the SPDR retail ETF has rallied 20.1% and the S&P 500 has advanced 23.4%.

-Tomi Kilgore

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06-17-24 1146ET

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