Interactive Investor

Dixons Carphone rally can go the distance

24th May 2017 12:49

Lee Wild from interactive investor

Chief executive Seb James has softened up the City ahead of Dixons Carphone's full-year results next month. Sales during the fourth quarter were better than consensus forecasts, and the electrical retailer's shares have had their best day in a long while.

Like-for-like revenue rose by 2% in the 16 weeks ended 29 April versus analyst expectations of 0.9%. Total three-month sales were also up 2% at constant currency - 6% if you add in a foreign exchange boost - and by 3% and 9% for the year, respectively.

After "another good year," according to James, and despite "a lively political backdrop," the owner of Carphone Warehouse and CurrysPCWorld will make an annual profit of £485-£490 million, compared with previous guidance of £475-£495 million.

It would have been more but for a difficult year at the phones business, which held back numbers for UK & Ireland. Samsung delayed its much-publicised S8 handset for five weeks, phones supply was limited, and there's also been "some shift to SIM only".

However, merging its key Currys, PC World and Carphone Warehouse brands into the so-called 3-in-1 format is as good as done, and like-for-like sales in UK & Ireland grew by 2%, more than expected. Quarterly sales growth of 2% in the Nordics and 5% in Southern Europe was also impressive.

While this update is unlikely to trigger substantial earnings upgrades, Investec analysts Alistair Davies and Kate Calvert suspect Dixons' electricals business is gaining share in a softer market. Issues at the mobiles unit should unwind next year, too, they say, amid new product launches.

"Self-help and market share gains should drive further underlying profit growth, notwithstanding a consumer slowdown, and longer-term opportunities persist through [business-to-business unit Connected World Services]," writes the broker.

This is all good news for stockbroker Justin Urquhart Stewart, co-founder of Seven Investment Management, who named Dixons Carphone his Interactive Investor Tip of the Year here just before Christmas.

 

Then, the shares were trading at 345p. It's not been plain-sailing since, but after outperforming the market for the past six weeks, and up 6% today, Dixons is back within touching distance of 350p for the first time since January.

And, after famously backing Anglo American the year before - Anglo shares quadrupled - Dixons is worth following.

"This is a company which, if actually we're going to see maybe a softer Brexit coming through and we actually do see a slowdown, but not actually a recession, it could be in a position to benefit," said Justin, "particularly with a weaker pound."

Investec certainly believes there's upside here, sticking with a 'buy' rating and price target of 405p, roughly where the stock was before the Brexit vote.

And even at that level Dixons would only trade on 12.4 times Investec's earnings per share (EPS) estimates of 32.6p in the year to April 2018.

On a calendar-year basis, the shares trade on a price/earnings (PE) ratio of less than 10.5, largely around concerns about the UK consumer. Twelve months ago it was 14.7 times.

Full-year results on Wednesday 28 June will give us a good idea of whether momentum has spilled over into the first two months of the new financial year.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.