Stock Analysis

Do JB Hi-Fi's (ASX:JBH) Earnings Warrant Your Attention?

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ASX:JBH
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Some have more dollars than sense, they say, so even companies that have no revenue, no profit, and a record of falling short, can easily find investors. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'

In contrast to all that, I prefer to spend time on companies like JB Hi-Fi (ASX:JBH), which has not only revenues, but also profits. While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. In comparison, loss making companies act like a sponge for capital - but unlike such a sponge they do not always produce something when squeezed.

See our latest analysis for JB Hi-Fi

JB Hi-Fi's Earnings Per Share Are Growing.

The market is a voting machine in the short term, but a weighing machine in the long term, so share price follows earnings per share (EPS) eventually. That means EPS growth is considered a real positive by most successful long-term investors. As a tree reaches steadily for the sky, JB Hi-Fi's EPS has grown 27% each year, compound, over three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.

I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. JB Hi-Fi reported flat revenue and EBIT margins over the last year. That's not bad, but it doesn't point to ongoing future growth, either.

The chart below shows how the company's bottom and top lines have progressed over time. For finer detail, click on the image.

earnings-and-revenue-history
ASX:JBH Earnings and Revenue History May 4th 2022

While we live in the present moment at all times, there's no doubt in my mind that the future matters more than the past. So why not check this interactive chart depicting future EPS estimates, for JB Hi-Fi?

Are JB Hi-Fi Insiders Aligned With All Shareholders?

Like standing at the lookout, surveying the horizon at sunrise, insider buying, for some investors, sparks joy. Because oftentimes, the purchase of stock is a sign that the buyer views it as undervalued. However, small purchases are not always indicative of conviction, and insiders don't always get it right.

JB Hi-Fi top brass are certainly in sync, not having sold any shares, over the last year. But my excitement comes from the AU$141k that Independent Non-Executive Director Geoffrey Roberts spent buying shares (at an average price of about AU$47.04).

On top of the insider buying, it's good to see that JB Hi-Fi insiders have a valuable investment in the business. Indeed, they hold AU$47m worth of its stock. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.9% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Terry Smart is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like JB Hi-Fi with market caps between AU$2.8b and AU$9.0b is about AU$2.7m.

JB Hi-Fi offered total compensation worth AU$2.3m to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO compensation is hardly the most important aspect of a company to consider, but when its reasonable that does give me a little more confidence that leadership are looking out for shareholder interests. It can also be a sign of good governance, more generally.

Does JB Hi-Fi Deserve A Spot On Your Watchlist?

You can't deny that JB Hi-Fi has grown its earnings per share at a very impressive rate. That's attractive. The cranberry sauce on the turkey is that insiders own a bunch of shares, and one has been buying more. So it's fair to say I think this stock may well deserve a spot on your watchlist. You should always think about risks though. Case in point, we've spotted 2 warning signs for JB Hi-Fi you should be aware of, and 1 of them is a bit unpleasant.

There are plenty of other companies that have insiders buying up shares. So if you like the sound of JB Hi-Fi, you'll probably love this free list of growing companies that insiders are buying.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

Valuation is complex, but we're helping make it simple.

Find out whether JB Hi-Fi is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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