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Navigating the Current Reporting Season: Focus on High-Valuation Stocks
With the reporting season underway, my primary concern revolves around stocks that are presently trading at or near all-time highs, reflecting their steepest valuations in recent memory. Such circumstances create a precarious scenario; any results falling short of outstanding expectations could indeed result in heightened volatility or substantial sell-offs. Conversely, achieving exceptional results in this context is no easy feat—often, even solid earnings can lead to stock price declines.
Spotlight on JB Hi-Fi
One company that stands out in this environment is JB Hi-Fi (ASX: JBH), recognised as one of Australia’s top retailers. The company has showcased resilience through various economic conditions, evidenced by its consistent earnings growth, efficient inventory management, and commendable dividend yield. However, JB Hi-Fi’s stock has surged by 73% over the past year, reaching record highs of $115 and boasting a price-to-earnings (P/E) ratio of 27 times—well above its historical average of around 16 times over the last decade.
Recent Earnings Performance
JB Hi-Fi’s journey through the fluctuating retail landscape is noteworthy. In early 2024, amidst a challenging environment characterised by rising interest rates and falling consumer confidence, the company reported its half-year FY24 results on 13 February 2024. At that time, the stock was priced at a more modest P/E of 13.5, with expectations at a low ebb. The results revealed total sales growth of 0.7%, totalling $3.62 billion, yet net profit dipped by 20% to $264 million. Nonetheless, these results exceeded market expectations, driven by lower costs and maintained EBIT margins above pre-COVID levels. The stock responded favourably, rallying 7.1% on the news and an additional 5.5% in the following session.
By August 2024, JB Hi-Fi again presented a mixed bag, with FY24 net profit declining by 16.4% to $438.8 million—though this figure was roughly 3.7% above consensus expectations. The company benefited from strong sales and effective promotions, although the final dividend was reduced by 10.4%.
The Latest Result: First-Half FY25
Fast forward to the first-half FY25 results, and we see a significantly different picture. The stock had revalued dramatically—up 82% since February 2024—despite no earnings growth. Heading into this report, JB Hi-Fi’s stock was trading at a P/E of 24.4, looking vulnerable at its peak valuation level, which heightened expectations.
The results released for this period showed notable growth:
- Sales climbed 9.8% to $5.67 billion, outperforming consensus estimates by 2.6%.
- EBIT rose 8.6% to $419.9 million, also exceeding consensus expectations.
- Net Profit After Tax (NPAT) increased by 8.0% to $285.4 million, outpacing forecasts.
- Interim Dividend grew by 7.6% to 170 cents per share.
However, the only point of contention was the gross margin, which fell short of optimistic projections. CEO Terry Smart emphasised the company’s focus on maintaining customer value, suggesting that prioritising top-line growth was crucial amid competitive pressures.
Despite a robust performance, market reactions were tumultuous on the day of the results, with the stock opening slightly down, peaking before ultimately closing 4.5% lower. Market analysts reacted by adjusting their target prices upward, yet many maintained Neutral ratings due to lingering valuation concerns. Currently, the stock trades about 13% higher than earlier in February, with a P/E ratio around 27.7, and analysts predict EBIT growth of roughly 8.7% for FY25.
Other Stocks with Similar Profiles
Several other stocks are facing comparable narratives, albeit with better earnings prospects. For instance, Hub24 (ASX: HUB) is trading at a forward P/E of approximately 65 times, compared to its historical average of 45 times. Despite a strong outlook, its recent results were shadowed by unexpected tax increases and higher operating costs, leading to volatile trading patterns after its earnings report.
Pro Medicus (ASX: PME) reported impressive revenue growth of 31.1%, but similar concerns over valuation remain. The stock also experienced considerable intraday movement but ultimately closed lower.
Conclusion: Embracing Market Volatility
While the recent earnings results for high-valuation stocks have incited volatility, many have shown resilience by recovering and pushing towards new highs. This suggests a valuable lesson for investors: as long as companies continue to meet or exceed expectations while signalling positive future growth, opportunities for profit could still prevail—even in a climate of heightened valuations.
As these dynamics unfold, investors must remain cautious and adaptive to the evolving landscape to navigate the challenges posed by inflated valuations and shifting market sentiments effectively.
