Valuation Limits Hurt Harvey Norman

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This story features HARVEY NORMAN HOLDINGS LIMITED.
For more info SHARE ANALYSIS: HVN
The company is included in ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Retailer Harvey Norman ((HVN)) delivered good news for shareholders yesterday with earnings guidance of 25-35% profit growth for the first half of FY08, an outcome Deutsche Bank suggests was about 10% above expectations.

The news led to increases to earnings estimates across the market and pushed the share price higher, but this in turn has led to some recommendation downgrades for the stock.

UBS is one example, the broker cutting its recommendation to Hold from Buy on valuation grounds. It suggests the profit guidance has effectively brought forward good news that was likely to come through at the February profit result and the market has simply re-priced the stock for this news and it is now only fair value.

The broker also suggests sales for the quarter were a little disappointing, a view echoed by Credit Suisse and JP Morgan. The poor sales result was not enough to stop the three brokers lifting earnings on the back of stronger franchise margins, JP Morgan increasing its estimates by just over 5% and UBS by around 7%.

Its revised EPS (earnings per share) forecasts are 30c for FY08 and 35c for FY09, while JP Morgan is at 28.8c and 32.9c respectively and Credit Suisse at 30.8c and 35.9c. Median EPS estimates for FY08 and FY09 according to Thomson One Analytics are 30c and 33c.

Citi has adopted a less optimistic view of the company’s outlook, suggesting the higher earnings reflect a one-off franchise margin increase and so is unlikely to be sustainable. The broker also points out like-for-like sales growth was relatively weak and new store sales are slowing, so in its view the stock has now run too hard.

As a result it has downgraded its rating to Sell from Hold, making it and Macquarie the only two brokers who see the stock as overvalued at current levels. This is reflected by the FNArena database of recommendations, which shows the two Sells compare to four Hold ratings and two Buy recommendations.

The average price target for the stock has increased to $6.67 from $5.99 prior to the upgrade in guidance, putting it well above the median share price target according to Thomson One of $6.10.

Shares in Harvey Norman this morning are little changed despite a stronger overall market and as at 11.35am were down 2c at $6.76.

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