The Motley Fool

Why I think JB Hi-Fi Limited is a buy at this share price

JB Hi-Fi Limited (ASX: JBH) has underperformed by 24% in the last year but rivals have stormed ahead. I believe the valuation disparity is now far too high.

At its AGM last month JB Hi- Fi reported solid like-for-like growth of 3.2%.

That’s actually quite respectable considering that Good Guys diluted that growth. Most importantly, overall sales guidance for 2017/18 was re-affirmed.

But analysts’ reaction was muted at best, and the shares have fallen further since. Compare this to Ltd (ASX: KGN), whose shares are up 11% this morning, and an amazing 170% for the year after reporting 36% quarterly revenue growth.

Fair enough, you might say. Well, maybe, but it is worth remembering that Kogan is a minnow in sales terms at around $400 million, compared to $6.8 billion for JB Hi-Fi.

While JB Hi-Fi has been slow to capitalise on the digital space, it is making progress. I still have a view that the customer likes to “touch and feel”what he’s getting, as well as the technical input from staff. Not everyone is ready made tech savvy ! Yet, far from being everyone’s Good Guys (if you pardon the pun), JB Hi-Fi is perceived as the fall guy between the soon to arrive Amazon and the likes of Kogan.

JB Hi-Fi is a well run business. For example, it has been able to extract the promised $15m -$20m synergies from the Good Guys acquisition a year ahead of schedule. I would not be surprised if there is more to come.

Return on Equity is over 20% and cashflow is strong. The company stressed at the AGM that it has been able to grow its dividend at 12.7% compound over the last five years. In my view that’s code to me to expect a further dividend increase at a higher rate than earnings.

The payout ratio currently is only 54% so there is plenty of scope to do this. The shares prospectively yield a net 6%, fully franked.

Foolish takeaway 

My view is that the market’s positive reaction to Kogan, far from hurting JB Hi-Fi, will actually help it. Whereas Kogan trades on a prospective multiple of 27x, JB Hi-Fi trades on just 10.8x. I reckon the shares are due a good rebound ahead of Christmas, and quite possibly a longer term re-rating.

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Motley Fool contributor James Middleweek 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.