Harvey Norman Holdings Limited shares go nuts on house price growth

Credit: Mark Robinson

Shares of Harvey Norman Holdings Limited (ASX: HVN) have risen 6.5% today, taking the company’s share price to $5.58. It’s the highest the shares have traded at since early 2008.

A solid earnings report was the catalyst for the strong rise in Harvey Norman’s share price. For the year ended 30 June 2016, the company said franchisee sales grew at twice the rate they did in the 2015 financial year at 7.6% to $5.33 billion.

That in itself was bolstered by its performance in the home and lifestyle market, which has been supported by the strong property market. Indeed, other companies such as Nick Scali Limited (ASX: NCK) and Fantastic Holdings Limited (ASX: FAN) have also benefited from this trend, together with JB Hi-Fi Limited (ASX: JBH) through its new ‘HOME’ format stores.

What’s more, JB Hi-Fi reported that it is benefiting from the recent closure of Dick Smith stores, helping to boost sales of electronic items. No doubt Harvey Norman is also benefiting from that closure.

Pleasingly for investors, management said that momentum had carried forward into the new financial year, with franchisee sales revenue up 6.4% from the beginning of July to 28 August. Comparable franchisee sales have been even stronger, rising 6.6% on the prior year period.

As a result of the surge in sales, earnings before interest and tax expenses, or EBIT, rose 27.1% to $522.5 million. Net profit after tax, or NPAT, rose 30% for the period as well to $348.6 million, but just over 20% to $314.7 million when you include the impact of property revaluations.

Harvey Norman’s board recommended the payment of a fully franked dividend of 17 cents per share, in addition to the 13 cents per share dividend declared at the half-year results. Totalling 30 cents for the full-year, the regular dividend marked a 50% improvement on 2015, although in 2015 the board also declared a special dividend of 14 cents per share (for a total of 34 cents that year).

Meanwhile, earnings per share for financial year 2016 were 31.36 cents, up 27.9% on 2015. At the current share price of $5.58, Harvey Norman’s shares are trading on a trailing price/earnings ratio of nearly 18x. It’s not super expensive, but it isn’t necessarily cheap either, with JB Hi-Fi also trading on a trailing 19.4x P/E multiple.

It is clear that Harvey Norman has benefited from the strong property market, and management expects that to continue for the time being. However, what investors do need to be mindful of is the headwinds that could face Harvey Norman – and the other retailers mentioned above – if conditions begin to deteriorate, or even if house price growth begins to fade.

Indeed, people typically buy new furniture to feature in their new homes, with many borrowing money to do so. But if demand for new homes diminishes, so too could that demand for new furnishings which could put a real dent in Harvey Norman’s share price.

It’s by no means something that I’m predicting, but it is a downside risk that you need to be mindful of.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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