The recent collapse in the share price of JB Hi-Fi Limited (ASX:JBH) has stung many investors whilst highlighting the pressure on retailers in Australia.
If you have followed our value investing blogs and reports for a while, it’s likely you’re aware of our preference for retailers with quite specific characteristics. We’re looking for a powerful brand, the ability for store rollouts both here and abroad, and a strong online presence.
The problem engulfing JBH could well be more specific though. Price deflation and margin pressures are currently hurting, but is the long term danger ultimately a structural shift? With JBH, I suspect it’s the changing of business conditions that has longer term value investors – like us – concerned.
Reviewing the numbers from a quantitative view is one thing, but considering the longer term qualitative view is another thing altogether. If you are going to invest your hard earned capital in a given business, it makes sense that you must believe in the long term future of that business.
Thinking about this reminded me of a similar discussion from early 2011.
Early last year I was interviewed by the guys from www.student2trader.com about value investing. In this interview I was asked a few questions that relate directly to the macroeconomic environment and changing business conditions. Here’s an excerpt:
Q: How important is historical business performance when valuing a company? How important is the effect of changed business conditions? Would you ever invest in an unproven business with solid prospects?
A: Generally I like to invest in companies that have a good track record and are run by capable owner-managers. The existence of good quality historical business performance gives one more confidence when making an investment decision. That said, I’m always trying to think ahead to ensure the company/ industry will not become redundant. For example, being the best CD retailer in town might not count for much in a few years when we are all downloading music online.
Fast forward 12 months and here we are. Like the vinyl record before it the CD appears largely headed for a dirt nap, on the scrapheap of redundancy. Throw in DVDs and video games, and a significant hole in future earnings may quickly be developing. The question now becomes; how do JBH and others evolve their offering to stay relevant?
Charles Darwin had a theory about evolution. I have a feeling retailers might be listening.
Historical performance was a more reliable marker in the days when Boards were driven by long-term conservative values and the main objectives were to secure company’s long-term future and assure its shareholders on-going dividend streams. These days every second CEO and MD is driven by the hubris of “growing the company” ( read “the empire I’ve built ) and short term stock market performance to pay themselves (mostly excessive) pay bonuses. Today, the past is an unreliable indicator of the future.
When I last looked at your organisation. I am sure you guys were recommending J Bi Hi Fi? How come you don’t see the Wall Street Guys writing blogs? Is it because they make real money and don’t have too? Im sceptical when people who are not rich start to advise me about becoming rich on obvious trends. Australian retailers in general missed the boat ten years ago and most will suffer losses if they don’t start competing at international prices. When I can buy a Canon 7D camera online at $1200.00 dollars a year ago from Hong Kong and retailers here are still charging up to 2700.00 dollars, retailers have lost the fight.
Hi John, re the management teams of today, I’d have to say that’s a pretty fair comment. It certainly is frustrating to see the proliferation of ridiculous executive salaries, bonuses and options.
It has been interesting to track the recent stoush between the management of Soul Patts and some other parties. SOL build businesses over decades and have a good quality management team that focus on the long term. They are also meaningful owners of the business. Unfortunately the same can’t be said of many other management teams.
Jedi, thanks for taking the time to comment – a sceptical eye is most useful in the stock market. I agree that the internet has certainly broken down physical barriers that once upon a time protected many retailers.
There is a common misconception that simply because something is in value it is automatically a buy. This definitely isn’t the case. As I’ve mentioned above; “Reviewing the numbers from a quantitative view is one thing, but considering the longer term qualitative view is another thing altogether. If you are going to invest your hard earned capital in a given business, it makes sense that you must believe in the long term future of that business.”
As for other ‘wall street guys’, I’m sure they’ve been very busy doing a range of other things. I’m happy to keep plodding along with long term value investing.
May the force be with you, and happy investing.
With the average tenancy of a CEO being around 7 years, all companies with incentive based pay schemes will be driven by short-term focus so the CEO can cash in whilst still in office (and control). Incentives need to be broadened to include much longer time frames, to encourage strategic thinking. Wesfarmers – Pre Coles acquisition, was a good example.