Stock may outperform HSBC's 7%-9.5% trigger yield notes linked to Best Buy, analyst says

By Emma Trincal

New York, Dec. 14 - HSBC USA Inc.'s upcoming 7% to 9.5% trigger yield optimization notes due Dec. 21, 2012 linked to the common stock of Best Buy Co., Inc. may not be an attractive substitute for the stock, analysts said.

The notes offer a 30% contingent protection on the downside. If at maturity the final price of Best Buy stock is less than 70% of the initial share price, investors will receive one Best Buy share per note, according to an FWP filing with the Securities and Exchange Commission. Otherwise, they will receive par.

Interest will be payable monthly, and the coupon is paid regardless of the stock performance.

Competition in retail

Michael Pachter, who covers the stock at Wedbush Securities, is mildly bullish on Best Buy with a $25.00 price target. The stock closed at $23.35 (NYSE: BBY) on Wednesday.

But he said that the value of the shares could change easily based on a variety of factors, which puts investors at risk when locked into a one-year security linked to the stock.

"You can't predict how much a stock can decline. Any stock can fall by 30%," he said.

"The company is not quite as competitive as it could be. It's mostly due to the internet. When anybody can walk around and scan an item ... to know how everything else is pricing, it has an impact on margins and earnings," he said.

Scott Tilghman, equity research analyst at Caris & Co., is very bullish on the stock and would prefer to own the shares outright. His concern is the upside.

"I wouldn't consider this because the stock price has a pretty good chance to go up," he said.

His target price over one year is $35.00, or 47% more than Tuesday's $23.73 closing price, a level he used in his research note on Wednesday.

"Of course, there's a caveat. This scenario could change if Europe and Asia are in the tanks, which would impact consumer spending in the U.S."

Discounting hangover

The stock fell 15% on Tuesday after the company reported that third-quarter earnings had missed analyst expectations. But Tilghman downplayed the news.

"There was an overemphasis on margin growth [on Tuesday]. People have their blinders on. Best Buy missed their margins because too many retailers have been very aggressive on their promotions in November," he said.

"Discounting was deeper than most people had anticipated, and so of course margins took a hit.

"The good news is that we're in December now and back to normal in terms of promotional activity. We've got Thanksgiving out of the way."

Tilghman said that Best Buy does not face solid threats from the internet.

"Price transparency has been in place for a few years. It's not a new phenomenon. And Best Buy has a pretty good presence online," he said.

Finally, he said that the current share price is attractive, making an increase all the more likely.

"The stock has been down pretty heavily," he said.

The current value of the stock is close to its 52-week low of $21.79.

"Valuations look attractive. Sustained buyback activities and new products coming to market next year are all positive. There is upside to be had over the next 12 months," he said.

The notes (Cusip: 40433K793) are expected to price on Friday and settle Dec. 21.

HSBC Securities (USA) Inc. will be the underwriter, and UBS Financial Services Inc. will be the agent.

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