JB HI-FI is the cornerstone of electronic retail

The margin of safety for JB lies in its position in the market, currently, it stands as the major player in retail electronics. Though notable competitors include the likes of Harvey Norman and Kogan. They don’t directly hold the same territory.

As Harvey Norman operates in the electronic retail space as well as interior renovation i.e. mattresses, etc. They can be seen as JB’s strongest competitor.

On the other hand, Kogan demonstrates the “grey area” of retail, as what I conceive as shady tactics to increase revenue for the firm. As they grey import products they expose themselves as opposed to the manufacturer to any issues with the product.

JB demonstrates a strong earnings record over the past ten years with positive EBITDA growth seen over that period. There is no doubt its ability to maintain its earning power in the long-term future (5 years plus) is unquestionable.

However, clear headwinds lie in the earnings power for the next few years. The macroeconomic picture for Australia and New Zealand looks to be unfamiliar to the consumer. One thing is for certain the rise in interest rates will most likely cut into the company’s bottom line over the next few years.

The extent to which JB suffers from the interest rate rises remains uncertain. The opportunity lies in this very fact, as expectations are depressed for the immediate future. A buying opportunity presents itself as a likely decline in the stock is almost certain as those expectations come further into play.

However, it is worth noting that as of the first quarter JB HI-FI reported strong revenue growth of 14.6% vs -7.5% previously. As consumer spending continues to rise in Australia, the extent to which this continues is very much uncertain and this information should be taken with a grain of salt.

A key standout for JB is its financial efficiency namely the ROIC is a standout among its peers.

JB will likely experience a decline of as much as 30%-50% in line with immediate future expectations. Furthering the value of this trade, as JB rebounds from levels will be derived from its “margin of safety”.

It should be noted my tolerance for declines in stock price is high. As of right now I have opened a small position and will expect to add in the coming year as the stock falls in line with expectations for the immediate future.