I can't remember how many times investors and commentators have written off or underestimated JB Hi-Fi Limited (ASX: JBH). Suffice to say, it's been a lot.
Ruslan Kogan of online retailer Kogan has been a particularly loud critic. Mr Kogan even challenged the JB Hi-Fi chief to a $1 million bet that Apple would cease selling products through JB Hi-Fi stores within three years.
Ex-Ceo Terry Smart probably should've taken him up on that bet given this.
As far back as February 2011, when i bought shares for my SMSF, I was positive on the company and its ability to adapt to new technologies, new competitors, online-only competitors and diversify into new lines. Remember what the company did when it first started in business? High-end Hi-Fi systems (hence the name) – which have gone the way of the dinosaur. (Typically, like an idiot I sold out in 2013 when rebalancing my portfolio and increasing my core stocks at the expense of growth stocks.)
Since listing in 2003, JB Hi-Fi has gone through many iterations, while competitors have been dropping like flies, particularly DVD and CD retailers – Brazin's Sanity, Virgin Music, HMV, EzyDVD, Retravision, Betta Electrical and Clive Peeters to name but a few. Dick Smith Holdings Ltd (ASX: DSH) needed private equity to drive an improvement in its business – which has so far been successful.
All the while, JB Hi-Fi has changed products, moving from hi-fis to car stereos to music CDs and movie DVDs, ipods, smartphones and tablets as well as games consoles and games for the likes of Microsoft's X-Boxes and Sony's PlayStation. Now the company has diversified as well, moving into white goods, appliances, vinyl records, guitars, drum kits, electric keyboards, DJ and party lights, speakers and many other musical accessories. Remote controlled drones are it's current latest product.
No doubt, JB Hi-Fi will continue to follow the trends and adapt to consumer tastes.
There's no doubt in my mind that JB Hi-Fi is a high-quality company. An average shareholder return of 23.6% per year over the past 10 years is evidence of that – more than double the market return.
Returns on equity over the past decade have been exceptionally high – although it has been juiced up by judicious use of debt.
The company has faced its issues of course, weak consumer sentiment can drive sales growth down, as can government budget comments and decisions. This year's $20,000 capital spend bonus for small to medium businesses certainly helped the 2015 financial year results, while last year's 'budget emergency' had a negative effect.
Foolish takeaway
The lesson for investors is that today's profit result should have come as no real surprise given the quality of the company. The 10% spike in the share price to $21.65 suggests many investors have only now decided to jump onboard. Even at current prices, the company is still trading on a trailing P/E ratio of 15.7x and paying a fully franked dividend yield of 4.2%, which grosses up to 5.9%. That appears to be an attractive proposition for such a quality stock.
