Australia | Jun 15 2007
By Chris Shaw
JB Hi-Fi (JBH) has been a star performer on the Australian market over the past year, its share price more than doubling from levels of around $5.00 in June last year to well over $10.00 now as the company has expanded into new products and so generated strong earnings growth.
Its latest expansionary move is into the mobile phone retailing market, the company announcing it will offer phone products via a “store within a store” set-up with Telstra (TLS) as its exclusive service and content provider.
Macquarie suggests the move was somewhat inevitable given the continued convergence of technology between phones, portable audio and cameras and the company’s position as a retailer of such items.
The broker also suggests the company should be an attractive partner for Telstra given the demographics of its own customer base, while it also sees potential for phones to eventually replace some of the slower moving categories the company currently offers.
GSJB Were is similarly positive on the move as it sees it as a way for the company to generate additional sales and earnings growth by bringing more people into its stores. Both brokers point out the move is likely to be a lengthy process in terms of any earnings impact though, as there is a long lead time in building up enough critical mass for it to provide any major boost to profits.
A bonus according to Weres is the company should enjoy a cost advantage over many of its competitors in the sector, which should reduce the potential of earnings to become more volatile via the move into such a market sector. The broker also notes the company has a good history of expanding into new products, which should help limit any earnings concerns those in the market may have.
A dissenting view is offered by Citi as the broker points out mobile phone retailing is a low margin operation, which means it will be difficult for the company to be able to gain much leverage from its strong buying power.
It continues to rate the stock as a Sell on valuation grounds, the valuation issue being the major sticking point for Macquarie also. The broker points out the stock is currently trading on a P/E (price to earnings) multiple of around 24x for FY08, which indicates limited value at current levels and so justifies its downgrade to a Neutral rating.
Weres agree the stock is not cheap at current prices but retains its positive rating on the expectation the company can continue to deliver strong earnings growth in coming years. The broker is forecasting EPS (earnings per share) of 36.8c this year, 46c in FY08 and 57.1c in FY09, compared with the Macquarie estimates of 36.1c, 43.9c and 51c. According to Thomson One Analytics the median EPS estimates are 36c, 45c and 54c.
Overall the FNArena database shows the stock is rated Buy three times, Hold three times and Sell/Reduce three times, with an average price target of $8.92. Thomson One shows a median price target of $9.45.
Shares in JB Hi-Fi this morning are trading slightly lower despite a stronger overall market as at 10.40am the stock was down 8c at $10.44.
