Why the Harvey Norman Holdings Limited share price is soaring today

Credit: Scott Lewis

Shares in homewares retailer Harvey Norman Holdings Limited (ASX: HVN) enjoyed a strong start to Friday’s trade on the ASX. The Harvey Norman share price opened up by more than 3% before the shares eased off a little through the session.

Including dividends, Harvey Norman shares have returned investors more than 10% over the last 12 months. It’s even more impressive that the shares have rallied by more than 23% in a little over two months since mid-December.

Why did this happen to Harvey Norman shares?

This morning, Harvey Norman revealed a healthy result for the six months ending 31 December 2015. The group grew net profit after tax (NPAT) by nearly 31% to $185.5 million.

A strong performance by the franchise stores helped to drive profits, leading to a $10 million decline in the ‘tactical support’ Harvey Norman extends to its franchisees in the form of rent, marketing and fee relief.

Global sales rose by 8% to $3.33 billion — helped to some extent by currency appreciation of the Euro and UK pound, but also by market conditions that have continued to benefit Harvey Norman.

Chairman Gerry Harvey struck a bullish tone on the outlook for retail businesses linked to the housing market. That includes not just Harvey Norman, but also stocks like Myer Holdings Ltd (ASX: MYR), JB Hi-Fi Limited (ASX: JBH), Fantastic Holdings Limited (ASX: FAN) and Nick Scali Limited (ASX: NCK).

Mr Harvey said: ‘Australian macroeconomic conditions have had an upward trend for three years and have been favourable for consumption in the homemaker and lifestyle categories. We anticipate robust construction and housing activity to continue this year, in response to pent-up demand and, particularly in New South Wales, Victoria and the ACT, dwelling starts [that] are materially above long term averages.’

It’s clear that Harvey Norman has enjoyed a strong tailwind from the Aussie housing construction boom. The group’s competitive position is also likely to benefit from the demise of former competitor Dick Smith Holdings Ltd (ASX: DSH), now moving toward liquidation. This week my colleague John Hopkins discussed the impact of Dick Smith’s failure here.

What’s next for Harvey Norman Holdings Limited?

Once owners finish building a house, typically the next things they buy are furniture and electronics.

Harvey Norman looks well placed to continue to capitalise on changes in homemaker consumer demand. As a leading indicator of that demand in Australia, investors will closely watch monthly and quarterly trends in housing completions, which are currently running at record levels.

Although it remains a concern that Harvey Norman has diversified into ventures like mining camp accommodation and dairy farming, the group’s core business looks healthy and the prospects look reasonable.

Foolish takeaway

Remember when the mainstream press ran front-page headlines in October 2014 that branded Harvey Norman the world’s most overpriced stock?

Since then, Harvey Norman shares have gone up by more than 27% — paying out healthy dividends along the way.

It goes to show that in the long run, a stock with sound economic fundamentals will always triumph over the forces of short-term market sentiment.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget BHP and Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Tim Dohrmann has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.