Best Buy Earnings: Profit Progress Drives Stock Price Surge; Shares Fairly Priced

Best Buy's strong cost containment saw its second-quarter non-GAAP operating margin arrive at 4.1%, topping its 3.5% guidance by a striking 17% and sending share prices upward by a similar magnitude in Aug. 29 intraday trading. Strong progress in its computing and mobile phones segment, which returned to 4% annual growth, suggests that the firm is finally seeing replacement cycles take hold for products purchased during covid-19-induced lockdowns. This implies that a return to modest sales growth is achievable within a couple of quarters. While profit progress was encouraging, we view it as more of a pull-forward of expected operating leverage than as a permanent upward shift in the firm's long-term margin trajectory and continue to expect long-term operating margins to remain rangebound between 4.5% and 5%. We expect to raise our $91 fair value estimate by a mid-single-digit percentage after digesting results and now view shares as fairly priced.