Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

ASX: JB Hi Fi Limited

Is JB Hi Fi the king of cash generation?

JB Hi-Fi Limited 'JB Hi Fi'(ASX:JBH) is a specialty discount retailer of branded home entertainment products. JB Hi Fi's products fall into consumer electronics, car sound systems, music, DVDs and white goods.

JB Hi Fi is an innovative business. It launched a music subscription streaming service branded 'JB HI-FI NOW' which will have a mobile app released shortly to compliment the online launch.

JB Hi Fi have opened 10 new stores in the first half of 2012 financial year and have plans to open a further 53 stores in the coming years. JB Hi Fi maintain that they can not only do this but achieve 'good organic sales growth'. It seems their cash flow will allow them to grow organically (the best kind of growth) and this should only serve to entrench JB Hi Fi's position further as the number one home entertainment retailer in Australia and New Zealand.

JB Hi Fi is a literally a cash flow machine. The company generated over $185 Million in cash flow for the 6 months just past. In May 2011, JB Hi Fi took on about $170 Million in debt to buy-back their own shares. In the past six months they have paid back about $129 Million of that debt. At that rate, with $58 Million cash still in the bank, they are on track to have no net debt by next month.

Is this business easy to understand?

JB Hi Fi themselves think it is and to take a quote from page 15 of their half year results presentation "Keep It Simple - It's a simple business!"

Retail, when done well, is easy to understand. The retailer buys product from their suppliers as cheaply as possible and attempts to sell it as expensively (albeit competitively) as possible.

Does this business have a sustainable competitive advantage?

§ JB Hi Fi has a unique value proposition in the market place. They virtually hold the number one market share position in every product category they sell.

§ JB Hi Fi has a very strong brand name.

§ JB Hi Fi pride themselves on a very low cost business structure. JB Hi Fi does not operate a warehouse. This reduces their costs immediately in comparison to the competition. Instead, they have all stock from suppliers delivered directly to each store, with the majority of stock being stored on the shop floor. JB Hi Fi dedicate a lot of time to keeping their 'Cost of Doing Business' as low as possible.

§ JB Hi Fi employ a lot of 'credible' staff. Their staff are typically 'Gen Y'ers', who not only know the products and the technology, but use it themselves.

What are the risks facing this business?

It is no secret that JB Hi Fi, along with all other retailers, face a couple of big risks at the moment. The first risk is a cyclical risk due to 'de-leveraging' by consumers and a cutting back on spending across the Australian populace. The cyclical risk will eventually change as confidence comes back to our economy as well as the global economy.

The second risk is probably more important. It is a structural risk to the way retailers operate in future. The traditional 'bricks and mortar' retailers have to structurally change the way they do business due to the massive penchant we collectively have for buying online. To this end, JB Hi Fi has addressed this with a 'multi-channel' approach. They reported in their half yearly report last week that their online sales grew by 87.7% on the previous period.

The risks facing JB Hi Fi are being felt more acutely by their competition and this is helping JB Hi Fi grow market share during this tough retail trading period. JB Hi Fi, with their intended organic growth and even larger economies of scale, are likely to come out of this difficult time stronger than their competition.

Is it run by able and trustworthy management?

Well, the CEO is Terry Smart. He probably is very smart and he has over 15 years experience in retailing. And, I have seen the Chairman, Patrick Elliott, interviewed a couple of times on TV over recent years and he just oozes intelligence. Patrick has been the Chairman of JB Hi Fi for the majority of the past 11 years.

The management are keeping things simple, yet continuing to innovate and create new revenue streams for the business via more stores and new product / technology lines. They have a keen focus on keeping costs down.

I would be happy to see them buy back more shares as this generally increases the value of the business. However, I would personally prefer they bought back more shares in future out of their cash flow rather than take on debt to do so.

Is it trading at a bargain price?

JB Hi Fi handed down their half yearly results for the first half of 2012, and with that, I saw the value of the business jump considerably now and into the future. This is due to a number of factors, a growing profitability courtesy of their share buy-back, a reduction in their debt levels and future growing revenues with the organic growth planned with more stores and new innovations.

Company: JB Hi Fi Limited

ASX Code: JBH

Edge7 Rank: Gold 1

2010 Actual Valuation: $22.66

2011 Actual Valuation: $17.16

Today's Share Price(Feb 17): $11.24

Margin of Safety: 47.18%

2012 Forecast Valuation: $21.28

2013 Forecast Valuation: $27.64

2014 Forecast Valuation: $29.50

*Please note that this estimate of intrinsic value is subject to change on a daily/weekly basis.

Summary

In summary, JB Hi Fi is a fantastic business with high profitability, amazing cash flow, minimal debt and sound management. It is trading at a discount to my estimate of intrinsic value with the current estimate of intrinsic value rising over the next couple of years.

edgeseven.com.au

This article is published by Dean Mico.

Disclosure: Dean Mico does now own shares in JB Hi Fi Limited again. After selling at circa $22.00 in mid September 2010, he has brought in again a couple of times last week.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

Disclosure: I am long OTC:JBHIF.