Harvey Norman Holdings Limited (ASX: HVN) may have found its feet after tanking to a near four-month low on the back of a very disappointing result that left its chairman Gerry Harvey scratching his head.
The stock is trading at around breakeven at $3.89 even as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) fell around 0.5% in a broad based selloff.
While that's small comfort for shareholders who watched the stock crash 15% in the last two days, they can at least look at the silver lining – valuation of the stock is probably near or below even the most bearish analysts' forecasts!
The stock is now trading at around a 10% discount to its nearest rival, JB Hi-Fi Limited (ASX: JBH) based on FY19 consensus price-earnings (P/Es), and even Credit Suisse has been prompted to upgrade the stock from "underperform" to "neutral" on the back of the drubbing.
There is probably valuation support for Harvey Norman at around these levels, but those who call the share price hammering an "overreaction" are missing the point.
Harvey Norman should trade at a discount to the sector as its plan to follow in the path of Wesfarmers Ltd (ASX: WES) has fallen flat!
Conglomerates almost always trade at a discount and the big writedown of Harvey Norman's investment in a Victorian dairy farm and cattle stud shows why.
The electronics and furniture retailer put $34 million of shareholders' funds into the joint venture (JV) in 2015 and has written down the value of the investment by 61%, with further writedowns likely as Harvey Norman is in dispute with its JV partner.
Interestingly, none of the major brokers have criticised Gerry Harvey on this – not from the few reports that I have read.
Further, an additional discount should probably also be slapped on the stock due to Gerry's tendency to address shareholders' concerns by asking them to sell their stock. Harvey Norman just doesn't rank high on corporate governance and a "Gerry Discount" is warranted.
I also can't see much upside for the business in this climate with the growing threat of Amazon.com, the success of online retailers like Kogan.com Ltd (ASX: KGN) and a cooling housing market dragging on the core business.
I think investors shouldn't pay too much attention to baseline valuations for Harvey Norman's stock. I see further downside risks from here.
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