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Get Four
|  | JUNE 9, 2004
 INDUSTRY IN FOCUS By Amrit Tewary Consumer Electronics' Growing Hum S&P has a modestly positive outlook on computer and electronics retailers -- and a 5-STAR rating on sector leader Best Buy Consumers are increasingly embracing digital products for use in the home, the car, and elsewhere. That's good news for the companies that sell high-tech gear and related services -- and one reason why Standard & Poor's Equity Research raised its investment outlook on the computer and electronics retail subindustry to modestly positive from neutral on June 8. Stocks in the group were up sharply in 2003, with the subindustry index advancing 75.0% in 2003, vs. a 27.4% rise for the S&P 1500. And while things have cooled down in 2004, the subindustry index remained in the green through June 4, posting a 1.6% rise, vs. a 1.2% gain for the 1500. (It's worth noting that there can be sharp, relatively quick price movements in these stocks.) We believe long-term trends for the group are favorable, and expect consumer-electronics retailers to further benefit from the trend toward consumer use of digital products and services. As new products are introduced, we see retailers' inventory management -- and their ability to sell more in-demand and/or high-margin items as part of their product mix -- becoming increasingly important in determining their success. NET DELIVERY. In addition, we anticipate a growing convergence between computers, televisions, cameras, and telecommunications equipment. This should include portable devices that make it increasingly easy to access information and entertainment. As for the impact of the Internet, the growing availability of entertainment for downloading from home is likely to hurt long-term sales of prerecorded media (e.g., CDs and DVDs) at stores, in our view. We believe that the extent to which the Internet is used as a medium for downloading or distributing recorded entertainment is likely to depend, in part, on the pace at which consumers switch to faster Web hook-ups, such as cable modems and digital subscriber phone lines. Also, we think retailers will have increasing opportunities to sell devices that play downloaded content, and possibly to sell new subscription services for music and video. Our favorite names in the group? Our top-ranked stock is Best Buy (BBY ; recent price, $53.30), which carries S&P's highest investment recommendation of 5 STARS, or buy. We think Best Buy is best positioned among its industry peers to benefit from a strong digital-product cycle. We also like videogame retailer GameStop (GME ; $15.9), ranked 4 STARS, or accumulate. We think recent price cuts from game-console manufacturers will produce higher unit sales of videogame hardware -- and dollar sales of related software and accessories. Also, we think the release of several new software titles later in fiscal 2005 (January) should boost store traffic. Electronics Boutique (ELBO ; $27.2), followed by S&P emerging growth analyst Markos Kaminis, also carries a 4-STARS ranking. Note: Amrit Tewary is a Standard & Poor's equity analyst. He has no affiliation with any company referred to in this article. He has no ownership interest in any company referred to in this article. Affiliates of SPSI (Standard & Poor's Securities Inc.) received non-investment banking compensation from Best Buy (BBY; ranked 5 STARS, or buy) during the last 12 months. An affiliate of SPSI received non-investment banking compensation from Electronics Boutique (ELBO; ranked 4 STARS, accumulate) during the past 12 months. GameStop (ticker GME; ranked 4 STARS or accumulate) is not a client of SPSI or of any of its affiliates. S&P analyst Markos Kaminis currently covers Electronics Boutique.  Analyst Tewary follows shares of computer and electronic retail stocks for Standard & Poor's Equity Research All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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