BEST BUY CO INC (BBY) stock intrinsic value fair value estimate & owner earnings analysis

Best Buy sells consumer electronics, computers, phones, appliances and related services through big-box stores and online in the United States and Canada. Revenue in the fiscal year ended January 31, 2026 was $41.7 billion: $38.3 billion in the United States and $3.4 billion in Canada. Computing and mobile phones is the largest category (about $18.0 billion, 47% of U.S. revenue). Over the last two years it has grown 6.5% while consumer electronics fell 12.4% to $10.5 billion and appliances fell 23.8% to $4.2 billion. Best Buy returns most of its cash flow after capital spending ($1.26 billion in fiscal 2026) to shareholders: $801 million of dividends plus $273 million of share repurchases that year, and the quarterly dividend is now $0.96 a share (about $805 million a year). What we measure. We value the cash the business generates for its owners: operating cash flow, less swings in working capital, less stock compensation, less only the capital spending needed to keep stores running. On that basis, per diluted share, this came to $4.73, $3.91, $5.18, $6.55, $8.39, $10.64, $7.16, $6.01, $6.98 and $7.83 in fiscal 2017 through 2026. Part of the rise is fewer shares: the diluted count fell 34%, from 322.6 million to 212.1 million. Our earlier published figures used a different basis and are not comparable with these. We exclude fiscal 2021 and 2022 from the starting level because pandemic demand pulled forward sales (revenue of $47.3 billion and $51.8 billion, against $43.6 billion before the pandemic). Adding back cash interest to get the cash produced before lenders are paid, the other eight years range from $1.28 billion to $1.82 billion with a median of $1.58 billion. Two judgements affect this. First, working capital is excluded because it swings with holiday timing, but it has not been harmless: it absorbed $1.58 billion of cash across fiscal 2024 to 2026, largely from shrinking payables (down $0.9 billion over those three years), and cash flow after capital spending ($3.3 billion over the three years) was roughly what went out in dividends and buybacks ($3.5 billion). Second, Best Buy booked restructuring charges of $46 million, $41 million, $254 million, a $34 million credit, $147 million, $153 million, a $3 million credit and $190 million in fiscal 2019 through 2026. The accounting adds the charge back as non-cash and the later cash payment falls in the working-capital lines we strip out, so the cost never reaches our figure; we deduct $100 million a year (the eight-year average is $99 million) from the starting level, giving about $1.48 billion a year. In fiscal 2026 the figure grew 9.8% ($1.51 billion to $1.66 billion); our base case assumes no growth from a starting level below fiscal 2026's ($1.60 billion after the same deduction), so it does not lean on that rate continuing. Recent results. In the 26 weeks ended August 1, 2026, revenue rose 2.8% to $18.7 billion (second quarter +3.6%), gross margin was 23.7% against 23.3%, and operating income was $791 million against $470 million; excluding restructuring (a $15 million credit this year, a $223 million charge last year) it was $776 million against $693 million, up 12%. Operating cash flow rose to $1.30 billion from $0.78 billion, but that came from working-capital timing (a swing of about $0.6 billion), not from earnings. Two good quarters are consistent with our starting level and we have not raised it. Balance sheet. At August 1, 2026 Best Buy had $2.26 billion of cash and $1.17 billion of debt, mainly $500 million of 4.45% notes due 2028 and $650 million of 1.95% notes due 2030, with, apart from small finance-lease payments, nothing falling due before 2028. We treat $1.5 billion of cash as needed to run the stores (cash was between $1.45 billion and $1.74 billion at the other balance sheet dates we reviewed), leaving $755 million of excess. The low coupons are worth about $105 million to shareholders (approximate; we assumed the notes run about two and four more years), so in every case Best Buy owes roughly $309 million net, or $1.45 per share on 212.7 million diluted shares. Store lease obligations ($2.96 billion) are rent already paid out of the cash flow we measure and are not subtracted again. Base case: $91.61. Revenue and cash flow stay flat at about $1.48 billion a year for ten years, then erode 3% a year. We credit no growth: revenue grew only 0.6% a year from fiscal 2017 to 2026, and the advertising, marketplace and membership businesses named in the filings are not separately reported in the figures we used, so we gave them no separate credit. We erode after year ten because nothing we can name ensures big-box electronics stores stay central beyond that; this is a judgement. The business is worth $19.8 billion, it owes $0.3 billion net, leaving $19.5 billion, or $91.61 a share. Bear case: $42.42. The downturn we use is the one Best Buy has actually had. From fiscal 2023 to 2025 revenue fell 10.3% ($46.3 billion to $41.5 billion); gross profit fell $527 million and operating income fell $533 million, so essentially every lost dollar of gross profit reached the bottom line. Applying that to today: revenue down $4.3 billion, gross profit down $966 million, operating income down $977 million, or $742 million after a 24% tax rate. Cash flow drops to $1.11 billion in year one and $737 million in years two through ten with no recovery assumed (operating income in fiscal 2026 was still below its fiscal 2023 level of $1.8 billion), then erodes 5% a year. The business is worth $9.3 billion, it owes $0.3 billion net, leaving $9.0 billion, or $42.42 a share. In this case cash flow is about 17 times fiscal 2026 cash interest of $44 million, and the $500 million due in 2028 could be repaid from the $755 million of excess cash; however, $737 million is below the roughly $805 million current dividend rate. Bull case: $142.69. Cash flow starts at the fiscal 2026 level less the same $100 million ($1.60 billion) and grows 2% a year for ten years to $1.92 billion, then holds flat. Evidence: revenue grew 3.5% a year from fiscal 2017 to 2020, and the latest half-year shows sales up 2.8% and gross margin up 0.4 point. The business is worth $30.7 billion, it owes $0.3 billion net, leaving $30.4 billion, or $142.69 a share. How we arrived at the $40 margin-of-safety price. How sure are we of the earnings level? Reasonably sure of a band, not a point: in the eight non-pandemic years cash flow before interest ranged from $1.28 billion to $1.82 billion. The worst plausible outcome is a repeat of the fiscal 2023 to 2025 slide while consumer electronics and appliances keep shrinking and computing gives back its gains, or something worse that no case models. The structure survives that: cash exceeds debt and nothing material matures before 2028, but rent on the stores is fixed. If we are wrong on the main points: if the working-capital outflow of fiscal 2024 to 2026 ($527 million a year on average) kept recurring, the base case would be worth $58.46; if restructuring costs ran $200 million a year, $85.32; if cash flow eroded 3% a year from today rather than staying flat, $75.84. The price assumes a three-to-five-year holding period, with about $3.84 a share a year in dividends meanwhile (in fiscal 2024, though, cash flow after capital spending was $675 million, short of the $801 million dividend). At $40 the dividend yields 9.6%. A 20% annual return over three years from $40 requires the shares to be worth $57.60 at the end, after about $11.52 of dividends at today's rate; that is below the $58.46 value if the working-capital drain kept recurring, and well below the base case. If the bear case played out and shares were worth only $42.42 in three years, it implies about 10% a year, the downside at this price. The price is not set higher because the working-capital drain, repeated restructuring and a shrinking electronics base are the things most likely to prove this estimate wrong.