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JB Hi-Fi – the best Christmas stocking stuffer

by Charlie Aitken

JB Hi-Fi (JBH) remains the only discretionary retailer in my high conviction buy list. That is based on a top down, bottom up and technical view.

At the top down level, I remain bullish on the Australian consumer as the wealth effect translates to confidence and discretionary spending. I’m particularly bullish on the crucial Christmas selling period, feeling Australians have pent up capacity to spend after many years of relative “austerity”.

However, the key is finding a discretionary retail company that has genuine leverage to that macro theme and will capture a disproportionately high percentage share of that Australian household wallet opening.

The revolution is here

We are clearly in “tech boom part 2” and my view remains electronic devices/gadgets/games/mobile telecommunications devices are going to be the hot seller this Christmas, as we move into a cheaper and cheaper hardware cycle and a shorter and shorter replacement cycle. Gen Y simply wants the hottest gadget and they want it now.

The other aspect of technology retailers is that the customers still want to see how the given device works, and compare it to other devices. This is where “bricks & mortar” technology retailers have an advantage over pure internet-based technology retailers. The internet retailing-based structural change that has dramatically eroded business models and margins in many other forms of discretionary Australian retailing, is clearly not as apparent in the technology retailing sector, and that is why the shorters of JBH, who clearly bet on permanent structural industry change, continue to be punished. There is still an 8% open short in JBH.

But when I look at current JBH consensus for FY14, I still see EPS is only forecast to rise from 118c to 125.6c, or 6.4%.

There is no possibility that EPS growth will be lower than headline sales growth. In fact, in reality what will happen is EPS growth will be a multiple of sales growth, due to strong cost control and higher margins.

The Q1 sales of 8.1% are tracking above the high end of the sales guidance range of 6% to 8%, which means it’s just a matter of how much consensus EPS forecasts need to be revised up.

However, we need to put this in perspective. Most of the retail analysts are negative on JBH, some spectacularly so, and they find it hard to write the earnings upgrade note when they have had a sell on the stock for the last 50% it has rallied.

To illustrate this point, the buy/hold/sell ratio on JBH is 2/9/5, while the median price target is $17.88.

Back to the future

Back on August 13 we wrote a note “JBH, game over for shorts”. The stock closed that day @$18.96. The note ended with this conclusion…

“There are occasions when you are reading a results presentation and you simply can’t compute why the given company has a massive open short position. Yesterday was one of those occasions for me when reading the JB Hi-Fi FY13 results and FY14 outlook comments.

Top down and bottom up, I think JBH is a compelling story, yet I then see the biggest open short position in Australia. It just makes no sense to me. It makes even less sense, if that’s possible, when you look at the investment arithmetic and prospective balance sheet ratios.

My view is sales growth in FY14 will be closer to 10% and EPS growth in the range of 10% to 15%. I am targeting FY14 EPS of 130c.

It seems increasingly clear that the retail analyst community blew with the prevailing JBH share price and open short position wind. Now that will start reversing and the stock will start heading to the mid $20’s and exceed its all-time high of $23.71.

For the shorters of JBH, I think the message is clear…”

Fast forward to today and this note is more valid than it was on August 13. We now have confirmation from the company of stronger than forecast trading conditions. It is now certain that JB Hi-Fi has leverage to the theme we are pushing, and that makes it lower real risk in the way I approach stock selection.

The only real question now is: how violent does the short squeeze become? I suspect we all know the answer to that and JBH remains my number one play for Australian Christmas and a core member of my high conviction list.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Published on: Monday, November 11, 2013

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