The Motley Fool

Why retail shares like JB Hi-Fi could be cheap

Is it possible that the share price of JB Hi-Fi Limited (ASX: JBH) is actually cheap?

You’d forgiven for thinking JB Hi-Fi is doomed from expectations of an Australian recession and predictions of carnage due to competition from Amazon.

Yet despite all that, the JB Hi-Fi share price is close to its all-time high. Since the start of 2019 the JB Hi-Fi share price has gone up 55% and it has more than doubled over the past five years, which doesn’t include the great annual dividend.

Indeed, JB Hi-Fi currently has a grossed-up dividend yield of 6%.

JB Hi-Fi has been one to consistently prove the doubters wrong. I’ve been impressed by how the company manages to grow its profit year after year whilst maintaining a solid profit margin.

Whilst JB Hi-Fi New Zealand and The Good Guys had negative sales growth in July 2019, JB Hi-Fi Australia impressed with sales growth of 4.1% on comparable sales growth of 3.2%.

Perhaps this ongoing success shouldn’t be too surprising. In the US, Best Buy – which is a fairly similar business to JB Hi-Fi – has also seen its share price more than double over the past five years with it very skilfully using the right strategies to counter Amazon and other online competitors.

In-fact, Best Buy CEO Corie Barry recently said “Over more than two decades consumer electronics continues a very steady line of growth. This runs counter to what may be the conventional but inaccurate wisdom that we work in a volatile and cyclical industry.”

Perhaps we shouldn’t be so tough on JB Hi-Fi. We all need to buy our new phones, computers and other gadgets from somewhere. Several of my purchases have come from JB Hi-Fi or The Good Guys in the past five years.

It’s not as though JB Hi-Fi is only a bricks and mortar business. In FY19 JB Hi-Fi Australia saw online sales grow by 23% and it now represents 5.5% of total sales. That’s a good defence against Amazon and others.

Foolish takeaway

With Australia’s unemployment rate falling slightly over September, it could mean that JB Hi-Fi has an even better medium-term future ahead. If some investors shun retail shares, it could lead to value investors picking up bargains like JB Hi-Fi earlier this year.

At 15x FY19’s earnings it’s not excessively cheap, but it could be a decent candidate for alternative dividends from a blue chip source. But I’m not sure I want to have retail shares in my own portfolio.

For good value growth I’d much rather buy one of these top stock ideas over JB Hi-Fi.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.

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