JB Hi-Fi 'mops up' spoils from Dick Smith downfall

Revelations that JB Hi-Fi Limited (ASX: JBH) could pick up an estimated $200 million in extra annual sales following the collapse of Dick Smith Holdings Ltd (ASX: DSH) has seen the specialty electronics retailer's share price jump 8.2% since the beginning of this year. Early estimates suggest the closure of around 100 Dick Smith stores could deliver JB Hi-Fi an earnings uplift of about $19 million in 2015-16.

Despite the lingering share market sell-off, JB Hi-Fi's share price has remained on an upward trajectory – having risen 19.5% since mid-December – based on reasonable growth forecasts for the next few years.

Adding to positive market sentiment, there's also growing speculation that a JB Hi-Fi mop-up of Dick Smith's inventory may also boost their bargaining position with suppliers, and potentially improve their margins and overall earnings.

JB Hi-Fi's recent (Dick Smith) windfall follows its recent successful entrance into white goods market through its HOME format stores, which demonstrates its ability to adapt to changing environments. Continued store rollouts underscore JB Hi-Fi's earnings growth strategy, and the retailer plans to open more of its HOME store, while some white goods are also beginning to surface within its traditional stores too.

With a long-term funding surplus or $109 million, a cash flow ratio of 1.19, a net-debt to equity ratio of 26.33%, a return on equity (ROE) which has averaged 50.71% since 2006, plus a (fully franked) dividend yield over 4%, JB Hi-Fi has one of the best investment grade balance sheets on the ASX.

In addition to receiving a boost to earnings from Dick Smith, it has also benefited from supportive housing backdrop and some attractive tax concessions for small business. The company plans to invest up to $55 million on the launch of eight new stores in financial 2016 and convert up to 16 existing stores to JB Hi-Fi Home.

Interestingly, despite good Christmas sales – which according to Harvey Norman Holdings' (ASX: HVN) Jerry Harvey were the best in eight years – JB Hi-Fi had 20 per cent tied up by short sellers. However, this doesn't appear to have put too much downward pressure on the price.

JB Hi-Fi posted a slightly better than forecast $136.5 million profit for the 12 months ended 30 June, and following on from encouraging first quarter sales growth, up 5.3% – 3.7% excluding the effects of store openings and closures – healthy sale over Christmas means 2Q sales should be equally, if not more impressive.

As a result, JB Hi-Fi is well on track to meet its annual sales forecast of $3.85 billion, up 5.5 per cent on 2014/15.

Having gone up 50% since its 2014 low of $14.56, JB Hi-Fi's share price isn't cheap. But based on a price-to-earnings ratio (P/E) of 15 times, it doesn't appear to be overly stretched, especially considering it's a strong margin business with considerable growth potential ahead of it.

Buying on the dips should prove to be a rewarding strategy.