Retailers are struggling but Harvey Norman one to watch

Harvey Norman (ASX:HVN)

Closing share price 19-7-16: $4.440 52-week high: $4.930 52-week low: $3.650 Most recent dividend: 13c

Annual dividend yield: 5.43%

Franking: 100%

Harvey Norman is a name synonymous with household furniture and electrical equipment.

As well as the Harvey Norman brand, Harvey Norman Holdings also owns Domayne and Joyce Mayne. About one third of the stores are company owned with the rest operated by independent franchisees.

Chairman Gerry Harvey has been a feature of the Australian retailing scene for decades. While many people have already written eulogies for bricks and mortar retailers, Harvey Norman keeps on keeping on.

There is certainly plenty of activity happening in the sector. Dick Smith went under at the start of the year, online retailer Kogan is down 16% having listed two weeks ago, and the Good Guys is in play with a possible trade sale or IPO. So, is staid old Harvey Norman a steady plodder in a turbulent sea?

Since 2012 Harvey Norman's financials have been steadily improving. Earnings per share were 16 cents in 2012 and are forecast to be 29 cents in 2016 rising to 33 cents in 2018.

Reported profits after tax have grown from $172 million to a forecast $319 million. Revenue has grown at about 10%pa since 2012 despite the number of stores remaining fairly constant.

Cash flow from operations, a key check to ensure the profits are genuine, has also been growing strongly and is consistently higher than the reported profit figure.

Over the past 12 months, the share price of Harvey Norman has declined by about 4%. At the same time earnings per share are expected to rise by 17%.

This means that value and price have been converging, and as the gap between value and price narrows the opportunity to attain the shares at a reasonable price increases.

At the moment they are still trading about 17% above our estimate of intrinsic value, but with the company due to report soon, they are one to keep a close watch on.

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