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Are retail shares like JB Hi-Fi Limited cheap?

The latest Westpac Banking Corp (ASX: WBC) and Melbourne Institute survey for September showed a bounce back in consumer confidence from August, which is good news for retailers like JB Hi-Fi Limited (ASX: JBH).

However, another round of bad news could be coming for the likes of JB Hi-Fi and Harvey Norman Holdings Limited (ASX: HVN), with the expansion of e-commerce giant Amazon Inc . The $590 billion company is rumoured to have picked a location in Melbourne to begin to roll out its online store.

Are JB Hi-Fi shares cheap?

Despite its blistering growth over the past 10 years and a forecast dividend yield of 5.1% fully franked, investors are still giving JB Hi-Fi a wide berth. Its shares are down 24% in a year and trading at just 11 times its profit.

On the face of it, Harvey Norman shares look even cheaper. However, it is forecast to report lower profits in coming years.

Be careful of the P/E

Using a price-earnings ratio (P/E) or dividend yield to value shares is fraught with error.

At any moment the price of a company’s shares will fluctuate and their profit can change. What’s more, dividend yields are not guaranteed.

The only way to have an intelligent insight of the value of any company is to take a three-to-five year view and focus on the expected cash flow of the business. That’s how the best investors, from Warren Buffett down, value and assess businesses.

Looking ahead three years, Amazon is likely to have set up its Australian shop, and JB Hi-Fi is likely to have grown modestly.

However, given that JB Hi-Fi is already a leader in some of its markets, like consumer electronics, some investors might argue that its growth will slow and it has its back up against the wall.

Foolish Takeaway

JB Hi-Fi will continue its store rollout in coming years while it integrates The Good Guys and deepens its online offering. While some analysts currently rate JB Hi-Fi shares as a “buy”, personally, given the risks that it is facing I would demand a more compelling valuation gap than we are currently being offered. JB Hi-Fi shares are closest to a hold in my book.

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Motley Fool Contributor Owen Raszkiewicz owns Amazon shares. You can follow him on Twitter @OwenRask.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Amazon. 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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