Once upon a time JB Hi-Fi was a category killer: its returns on equity were unassisted by debt and stratospheric and it was all reflected in a strong share price. But something has changed. I wrote previously, and commented elsewhere, that JB Hi-Fi was maturing, that returns on equity were flattening and that the sun was setting on the ability of the business to reinvest profits at the very high returns of the past. The impact of this of course is flatlining intrinsic values. Indeed take a look at the Skaffold valuation line chart below. You can see that even by 2014, JBH’s intrinsic values are expected to show no appreciation from 2009/2010. Maturity.
That of course hasn’t prevented me from buying a few shares around$15.00. Fortunately however we were quick to change our mind and even secured a small profit.
I wonder whether the first signs of business performance beginning to mature, is often the point when it becomes worth watching what directors do with their shares for some further insights?
JB Hi-Fi’s CEO, Richard Uechtritz, had been at the company for a decade prior to his retirement in 2010 and those watching his share dealings may have drawn a different conclusion to those being lulled by a bullish share price.
At the outset let me say there is no impropriety in a director selling their shares and none is suggested here. Directors are free to sell shares within the bounds of their staff trading policy and are required to report their dealings to the market.
And it’s through these announcements that the investor can see what directors are doing with their shares.
On August 20, 2009, JB Hi-Fi’s CEO held 2 million shares and 627,000 options
and he exercised options to buy another 180,048 shares at $7.27. A week later, JB Hi-Fi’s CEO had sold all of shares he had just purchased the week before for an average price of $17.65.
Then, between September 2 and 3, 2009, another 500,000 shares were sold at an average price of $18.22. By now JB Hi-Fi’s CEO held 1.5 million shares (down from 2 million on AUgust 20) and 447,267 options (down from 627,000).
Skaffold’s Valuation Line Evaluate screen for JBH reveals a maturing intrinsic value – little growth and lower IV in 2014 than 2010.
To alleviate the need to read thousands of annual reports, for every listed company, going back a decade try www.skaffold.com
Now back to our regular programming…
Between August 20 and September 3, there are just 13 days – call it two weeks.
Another 174,656 options were granted on 14 October 2009, and then, in early February 2010, JB Hi-Fi announced the retirement of its CEO.. Having sold 680,048 shares in the seven months before the announcement, JB Hi-Fi’s CEO sold another 500,000 shares during the first five days of March 2010 at an average price of $19.74 leaving him with 1 million shares and 621,923 options.
In his final director’s interest notice in May 2010, the retiring CEO of JB Hi-Fi listed his direct equity interest in the company at 1 million shares and the 621,923 options. For investors who are interested in gaining a possible inside track on the prospects and potential of a business, it may be useful to watch directors’ dealings in their shares.
Of course sometimes the selling can mean nothing at all but my observation is that watching the selling offers some insights. If motivated by urgency, a desire to lock in lofty share prices or grim expectations, information about director’s selling can be more useful than watching their buying.
In April 2011 (about a year later), Richard Uechtritz returned to JB Hi-Fi as a Non-executive director. Until his return, he didn’t have director’s obligations so he was not obliged to make public any of his private share dealings. Upon his return, however, he revealed that he owned only 421,000 options. In other words, he appears to have subsequently sold the one million shares he held at the time of his retirement.
JB Hi-Fi shares do not enjoy the lofty levels they once commanded and investors who tracked the sale of shares by its CEO may have been given a prompt to look deeper into the company, its prospects or at least the impact of those prospects on its shares. Of course it could all be happenstance, company CEO’s have no particular insights and their selling is purely a reflection of the need to diversify. ANy subsequent share price declines may just be coincidental.
JB Hi-Fi’s latest results were less than spectacular and, while the company will continue to win in the race against its listed peers, the reality is its margins remain under increasing pressure, it’s losing share to the internet and its remaining store rollout plan is contributing to a maturing set of metrics. Oh, and the share price now? Just above $9.30.
So do you think you should keep an eye on director’s dealings? What have been your observations? Can you nominate some companies in which directors dealings having given you cause to pause…
Posted by Roger Montgomery, Value.able author, SkaffoldChairman and Fund Manager, 9 May 2012.