Key Insights

JB Hi-Fi's estimated fair value is AU$145 based on 2 Stage Free Cash Flow to Equity JB Hi-Fi is estimated to be 21% undervalued based on current share price of AU$114 The AU$100 analyst price target for JBH is 31% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of JB Hi-Fi Limited (ASX:JBH) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (A$, Millions)  AU$689.7m AU$738.3m AU$772.5m AU$802.2m AU$831.3m AU$860.1m AU$889.0m AU$918.3m AU$947.9m AU$978.2m Growth Rate Estimate Source Analyst x3 Analyst x4 Analyst x3 Est @ 3.84% Est @ 3.62% Est @ 3.47% Est @ 3.36% Est @ 3.29% Est @ 3.23% Est @ 3.20% Present Value (A$, Millions) Discounted @ 7.8%  AU$640 AU$636 AU$617 AU$595 AU$572 AU$549 AU$527 AU$505 AU$484 AU$463

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = AU$5.6b

Story Continues

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.1%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = AU$978m× (1 + 3.1%) ÷ (7.8%– 3.1%) = AU$22b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$22b÷ ( 1 + 7.8%)10= AU$10b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$16b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$114, the company appears a touch undervalued at a 21% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.ASX:JBH Discounted Cash Flow September 12th 2025

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at JB Hi-Fi as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.8%, which is based on a levered beta of 1.106. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

View our latest analysis for JB Hi-Fi

SWOT Analysis for JB Hi-Fi

Strength

Earnings growth over the past year exceeded the industry.

Currently debt free.

Dividends are covered by earnings and cash flows.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market.

Opportunity

Annual earnings are forecast to grow for the next 3 years.

Trading below our estimate of fair value by more than 20%.

Threat

Annual earnings are forecast to grow slower than the Australian market.

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For JB Hi-Fi, there are three relevant items you should further examine:

Risks: Take risks, for example - JB Hi-Fi has  2 warning signs  we think you should be aware of. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for JBH's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Australian stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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