JB Hi-Fi Does It Better (And Better)

This story features JB HI-FI LIMITED. For more info SHARE ANALYSIS: JBH

By Chris Shaw

JB Hi-FI ((JBH)) has been one of the better performing Australian retail stocks in recent years and its track record of delivering solid results looks set to continue after an update on trading at the annual general meeting indicated sales accelerated to levels better than the market had anticipated.

September quarter sales rose by 8.4% and while in the view of UBS this can partly be attributed to lower comparable numbers for the same period last year, it was still ahead of expectations. As an example, Credit Suisse had been forecasting an increase of 5% for the period, so the quarterly outcome gives the stockbroker greater confidence full year guidance of 20% sales growth can be exceeded.

Christmas will be the key test according to CS, as while it expects like-for-like sales growth of 7% for the first half, JB Hi-Fi will be cycling tougher comparable numbers. Deutsche Bank is confident the company will deliver during the period, pointing out the acceleration in sales growth achieved through the September quarter, from 3.8% in the first few weeks to better than 8% for the period, came despite the fact the market was in a post fiscal stimulus environment.

The sales result wasn’t the only good news for earnings as management also announced a bringing forward of the new store rollout program, with the target for FY10 being increased to 22 from 18 previously. While this will boost sales, UBS notes it will also add to the group’s operating leverage, as improved buying, rebates, better fixed cost leverage and a growing scale in New Zealand are all combined delivering further margin expansion for the group.

To reflect this and the sales update delivered at the AGM, UBS has lifted its earnings forecasts, with its earnings per share (EPS) estimates now standing at 110c in FY10 and 132c in FY11, up from 109c and 130c respectively. Deutsche Bank has reacted similarly and lifted its net profit estimate for FY10 by 6% such that its EPS forecasts now stand at 114c and 139c respectively.

Credit Suisse has EPS forecasts of 111.2c and 132.7c for FY10 and FY11, the broker pointing out the company is in something of a sweet spot at present with respect to its market position, brand and new store development program. This means there remains upside scope to its numbers, as the broker suggests even slightly more bullish assumptions could support an increase in its FY12 EPS forecast to around 170c from 156c currently.

UBS also sees potential earnings upside from the operating leverage outlined previously, so even though the stock is trading on a FY10 earnings multiple of 17.7 times according to its forecasts and based on yesterday’s closing price, UBS still sees the stock as the cheapest among its peers. Given this, UBS retains a Buy rating on the stock, with its higher earnings forecasts seeing it increase the price target to $21.50 from $18.95.

Credit Suisse has also lifted its target to $21.00 from $20.27 but has only moved to a Neutral rating from Underperform previously, while JP Morgan also rates the stock as Neutral given a preference for those retailers that didn’t benefit as directly from the Government’s fiscal stimulus measures. As well, JP Morgan has some concerns about how the company will manage its costs and inventories as the pace of sales growth moderates.

Inspired by  an expectation of a three year capitalised annual earnings growth rate of 17% Deutsche Bank is more positive and retains its Buy rating, with what is the highest price target in the FNArena database at $22.75. This compares to an average target price of $18.89, up from $17.83 prior to the update. Macquarie (Neutral) has lifted its price target to $20.

With only Credit Suisse changing its rating the database now shows a total of four Buys, three Holds, one Reduce and two Sells, these coming from Citi and Bank of America Merrill Lynch, both of whom are yet to update for yesterday’s news.

Shares in JB Hi-Fi today are stronger and as at 11.10am the stock was up $1.40 or 7.2% at $20.82. Its range for the year is $6.87 to $20.89.

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