Lehman Wary of Best Buy & Circuit City: Guidance Too High

Lehman sceptical about prospects for Best Buy (BBY) and Circuit City (CC) given macro headwinds.

Tax rebate checks, excitement surrounding the Summer Olympics, and the continued conversion cycle from analogue to digital television should contine to bolster BBY, as will continued strength in video games, laptops, and home theatre will also drive performance. But Lehman remains cautious (2-Equalweight):

…we believe that these factors will probably just work to offset what will be one of the weakest environments for discretionary spending in recent memory. Also, we think that BBY’s recently provided FY09 EPS guidance set high expectations, which will further weigh on the stock. Our $45 price target equates to 13.9X and 12.6X our CY08 & CY09 EPS estimates, respectively.

Circuit City fares no better. Lehman initiates at 3-Underweight and a $4 price target, which would represent a 15% decline. Like Best Buy, Cicrcuit City will struggle in a deteriorating economic environment. Additionally, the offer from Blockbuster doesn’t look like it will go anywhere and the company faces fundamental structural challenges:

The challenges that have weighed on CC’s operational and financial performance are structural in nature and will be difficult to surmount, in our opinion. Also, we are sceptical that CC will be acquired by BBI given the vague strategic rationale for the combination and the uncertain details for the financing of the transaction. Even in an optimistic scenario, we think that it will take many quarters or even years to achieve a sustainable improvement in CC’s fundamental performance.

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