JB Hi-Fi Limited: 3 reasons to buy, and 3 to avoid

Credit: Peter Heath

Shares of JB Hi-Fi Limited (ASX: JBH) have pulled back from the all-time high levels they achieved last month, but are still hovering above $23 a share thanks to a 2.4% gain so far today.

While the leading electronics retailer is often regarded as being a high-quality business, some investors have a tough time trying to figure out whether or not the shares would be a good fit for their own portfolios. In reality, that is the same with any company: no investment in the share market comes without risk, and investors must choose whether the pros outweigh the cons.

With that in mind, here are three reasons why investors should buy, and three reasons why they should avoid JB Hi-Fi shares. I’ll let you decide which case is more convincing…

Reasons to BUY:

  1. Leading retailer: JB Hi-Fi counts itself among the country’s best retailers. It’s an easy-to-understand business which has time and again proven its ability to adapt to the ever-changing tastes and trends of consumers. In addition, it is also exploring a possible acquisition of The Good Guys which, if successful, would drastically increase its market share and could also give it an edge over fellow rival Harvey Norman Holdings Limited (ASX: HVN).
  2. Expansion: JB Hi-Fi is also very eager to continue pushing into the white goods market, which is another reason why an acquisition of The Good Guys would make sense for the business. The company is aiming for 75 stores by the end of financial year 2017, but that figure could be much higher thanks to the 100 stores owned by The Good Guys.
  3. Dividends: In addition to its potential to continue growing, JB Hi-fi also offers a decent fully franked dividend yield for those investors looking for income. At its current price of $23.05, the shares are trading on a trailing 3.9% fully franked dividend, grossed to 5.6%.

Reasons to AVOID:

  1. Disruption: JB Hi-Fi may be one of the country’s leading retailers, but that doesn’t mean it is immune from disruption – just look at Woolworths Limited (ASX: WOW) and the problem it is now facing with Aldi. JB Hi-Fi could also be disrupted by international powerhouses such as Costco or, the latter of which may be looking to expand its presence in Australia, or by other internet stores that are able to offer cheaper goods due to lower overheads.
  2. Economic headwinds: During times of economic uncertainty – or worse a crash – consumers tend to cut back on unnecessary spending. Most JB Hi-Fi stores that I’ve been to regularly (I’ll admit, JB Hi-Fi is my favourite store to spend money in) pack a decent crowd, but foot traffic (as well as traffic to their web store) could drop sharply if the economy did take a hit.
    Notably, that wasn’t the case during the Global Financial Crisis in 2009, whereby the company still reported growth in same-store sales. However, the performance was partially supported by a number of emerging trends in technology, which are no guarantee to be as supportive the next time around.
  3. Property prices: Interest rates are low, and look like going even lower, which could support further growth in house prices. However, if growth in house prices does slow – or if they fall in price – that could impact demand for items such as TVs as well as white goods from JB Hi-Fi’s HOME format stores. Again, this is no guarantee to occur, but it is a risk worth considering.

For the record, I love shopping at JB Hi-Fi and enjoy its culture and friendly atmosphere whenever I am a shopper there, but I do not own shares.

While they could still be a reasonable investment today, I have held off from buying thus far due to their price tag with the shares trading on a price-earnings multiple of almost 17x. That’s not outrageous, by any means – and they have risen remarkably since I added them to my watch list, so there is nothing to say they won’t climb higher from here – but considering the potential headwinds facing the industry, it is something to be mindful of.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and Costco Wholesale. Motley Fool contributor Ryan Newman owns shares of 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.

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