A point I failed to mention in my last post onĀ Baby Bunting (BBN) Can store roll-out still work? was be wary of analysis that shows a comparison of the current PE multiple against a long term average. Especially in retail or any industry that is seeing its business model changing.

For example you will often see broker reports that track the current PE multiple vs its historical average. Take the chart below from a broker report on JB Hi-Fi (JBH).

From this you could conclude that JBH is ‘cheap’ relative to its historical PE multiple. But these comparisons need to be filtered heavily. If the opportunities for reinvestment and store roll-out are vastly different today from the past then the multiple should be different. Think about the two tables from the previous BBN post which compare the reinvestment option vs non-reinvestment option.

Now JBH may be good value due to its cashflow and the ability to defend its business model in the future, but to argue that it is cheap today because it trades on a PE of 11x when it has traded at 15-17x in the past is lazy analysis and ignores the different dynamics driving future growth.