JB Hi-Fi: Result 2019

Does a 7% lift in net profit justify a 38% increase in the stock? That's how much JB Hi-Fi's share price has jumped since we covered the interim result six months ago.

Fear - or, rather, less of it - has been responsible. Amazon apparently isn't encroaching on JB Hi-Fi's consumer electronics territory, while the perception now is that the housing downturn is less of a worry (whether either of these is true is debateable). JB Hi-Fi's whitegoods brand, The Good Guys, saw earnings rise more than 50% in the second half - typically its weakest period.

Total sales rose 4% to $7.1bn, but strong tax time buying late in the financial year helped. While net profit rose 7% to $250m, earnings benefited from the lower depreciation charges we mentioned at the interim result. Had depreciation increased as in previous years, we estimate net profit growth would have been closer to 5%.

This irks us because management's short-term incentives were restructured last year. That management has benefited from accounting changes in an otherwise slow growth year makes us wonder if anything else might have been fiddled.

JB Hi-Fi is a well-managed consumer electronics retailer, and betting against it has been a long-term mistake. But it is undoubtedly mature - the company opened only three stores in Australia in 2019 - and the threats from online and housing markets remain.

The stock is now above our former Sell price and we're shifting our coverage to focus more attention on potential Buy ideas. While we're not officially downgrading to Sell, we think shareholders should at least consider taking some profit. We'd need a much cheaper price to buy JB Hi-Fi, so we're turning our attention elsewhere. CEASING COVERAGE.