Brokers and analysts are a fickle lot. On Monday in the wake of the record result and higher dividend, and hints of more to come this year, brokers were enthusiastic and some even gushed for a while before the quibbling started.
Some sell side analysts and institutions loved the JB Hi-Fi (JBH) figures which they found a bit surprising (and wondered how long the positive impact from the collapse of Dick Smith would last).
But there was none of the negativity that emerged yesterday. A day later and now its all overpriced doom and gloom as the herd claimed that the best of the retailer’s share price performance looks behind it, at least for now.
The shares fell 3.6% to $29 at the close yesterday in the wake of the broking gloom. That however didn’t reverse the solid rise in Monday which saw the JBH share price jumping 9.9% to $30.13 and touching an all time high of $30.36.
That big jump seems to have sparked the downgrades as analysts feel it the shares no longer good value – but you can bet that if it gets control of The Good Guys, it will be all bets are off, even if JB Hi-Fi issues a swag of shares to help finance any deal.
The prospect of fee income from a deal always seems to drive an improvement in outlook and better appreciation of the issuing company’s intrinsic value, doesn’t it?
While impressed with the way the business is performing, valuation is now an issue for analysts, with one broker downgrading its rating to the equivalent of "sell", and another two to "hold".
JBH is “performing strongly, little doubt", Credit Suisse analysts said, but they have still cut their recommendation all the way to "underperform" from "outperform".
“We believe there is not enough clarity on the performance of the Home format and JBH has a substantial lease commitment in larger than normal stores associated with Home," they write in a note to clients yesterday.
"Post a one-off step change in calendar year 2017, comparable store sales growth is likely to slow from the second half of that year, reducing earnings momentum as a driver of share price performance." They also worry that the earnings drivers for next year are in areas that are "less defensible to online competition".
Analysts at Citi lifted their earnings per share forecasts by 5% and 6% for the current and 2017-18 financial years, and upped their 12-month price target to $25 a share, from $21.60.
But they confusingly maintained their “sell” rating, noting that “paying an elevated multiple for a cyclical stock at or near peak-cycle earnings is unwarranted".
"In order to justify the current share price and headline PER multiple, JB Hi-Fi must successfully acquire and integrate The Good Guys, and is trading on 15.5x FY17e pro-forma earnings inclusive of Good Guys earnings accretion."
Deutsche Bank analysts took a similar view, wondering if the 2015-16 result was “too much of a good thing”, as they downgrade to a “hold” rating.
They also point out that the market looks to be pricing in "a high probability of a successful execution of a highly accretive Good Guys deal". The broker’s price target is a relatively high $29, newly up from $25 per share, but which still implies stale at best returns over the coming 12 months, according to media reports yesterday and broker notes.
Over at Morgan Stanley, analysts said their investment thesis for the stock is “played out” as they downgrade to “equal weight” (which means not so hot).
They admit that JB Hi-Fi’s annual profits topped even their "optimistic" estimate, but that the shares have likely run too far. In other words Morgan Stanley analysts got caught behind the curve (and if JB Hi Fi had not performed so strongly, would have no doubt quibbled about that).
