Dear Mr. Berko:

T.M., Moline, Ill.

Dear T.M.:

Management at Best Buy (BBY-$23.23) expects to report revenues of $51.9 billion in 2011, up about 3 percent from 2010 revenues of $50.3 billion. It’s tough going for this 4,500-unit retailer that sells consumer electronics, office products, entertainment software, appliances, computers, cameras and the like in the United States, Canada and Europe.

I reckon revenues for this year will be as flat as a flapjack, while earnings could be about 8 percent higher than last year. This big-box store (about the size of two football fields side-by-side) is facing weak consumer spending in the United States and overseas; revenues at BBY’s Carphone Warehouse (the largest independent mobile phone retailer in the world, with 2,400 locations in 10 European countries) have been grinding down. (This, though, is simply a reflection of the recession in Europe, which certain Europeans won’t acknowledge because it’s politically incorrect.)

Game sales and appliance sales are lackluster, as buyers have been more selective, purchasing mostly merchandise that has been heavily discounted. As a result, BBY’s net profit margins have declined significantly to a weak 2.5 percent in 2011, and management seems to lack the moxie to improve that number for 2012 or 2013.

Management is trying to streamline its operations, its product selections and its poor store service, but consumers are gravitating to lower-cost rivals like Costco, Amazon and Wal-Mart. Meanwhile, fierce competition across multiple retail channels is making progress much more difficult than management anticipated.

I think U.S. retail sales for 2012 and 2013 will be unimpressive, and that’s bad for BBY. Consumers are losing confidence; their wages are lower this year than last year or even a decade ago; their debt is at near-record highs; and the job picture still looks bleak. Europe is in a recession, and U.S. factories are producing fewer products to be shipped overseas. Because the euro is weak, U.S. exports to Europe have become more expensive for European consumers, whose collective incomes are diminished by high unemployment. That’s also bad for Best Buy.

On the plus side, the company has an excellent balance sheet: just 363 million shares outstanding, each with a book value of about $20, and shares trading at a low of 6.6 times this year’s expected earnings. That’s an unusually low price-to-earnings ratio but, in my opinion, is not an indication that BBY is undervalued.

Frankly, this low P/E ratio suggests that there may be weakness brewing in the near future. There are 24 analysts who rate BBY: four have a “strong buy,” two have just a “buy,” 17 tell you to “hold” and one brave soul recommends a “sell.” Frankly, I don’t know what “hold” really means. In my thinking, if a stock is not worth buying, why would you hold it? I think “hold” is Wall Street-speak for “We don’t have the guts to tell investors the truth.”

Sell your 100 shares and take a loss before that loss becomes larger.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775, or email him at mjberko@yahoo.com. © 2012 Creators.com