Dixons Carphone - How long will the honeymoon last?

Dixons Carphone: The fourth quarter trading update shows a group (including Curry’s, PC World and Carphone Warehouse) still trading very well, with pre-tax profit for the year to 2^nd May 2015 now guided to be slightly above the top end of the previous guidance range of £355m - £375m. LFL sales seem to be accelerating with a Q4 rise of 9% out-stripping the half-year rise of 8% and the full year number of +6%. The UK has led the way with annual LFLs of 8%, although there has been a very notable Q4 recovery in Southern Europe. Despite posting Q4 revenue LFLs of 8%, this region was still down 5% for the year. All this is without sacrificing price with group gross margins held steady, whilst group net debt is “expected to be ahead of guidance of £300m”. The current effectiveness of Dixons Carphone can perhaps be seen in part in the recent struggles of online UK rival AO World. All this has been achieved against the background of integrating the two sides of the group after last year’s merger. It is to their credit that this has been executed so well so far.

However, I am concerned as to how much of the progress has been the low hanging fruit. There will be more cost savings and integration benefits to haul out in FY2016, but after that the slog might truly begin. Their chosen markets of mobile devices, computers, brown goods and white goods are already very competitive and as AO World and many others have shown, the on-line barriers to entry are not that high. The price transparency offered by the internet means that maintaining, let alone growing, margins looks to be a big ask in the medium term. The group has trusted brand names, but that only gets you so far. For example, in the less exciting DIY sector, B&Q found that being the last man standing isn’t a passport to financial happiness. If eps growth does start to slow after the honeymoon years, then it will be difficult for Dixons Carphone to maintain its current rating. After this upbeat statement FY2016 eps forecasts will probably head up, towards 28p, which at 477p is a PE of 17.0x. This seems quite full for the likely c10% annual eps growth over current forecast horizons. Whilst the balance sheet looks healthy as net debt heads below £300m, dividend cover is being held quite high at about 3.25x. So the FY2016 dividend looks set to be around 8.6p, for a skinny yield of 1.8%. None of this looks exciting, but I came to much the same conclusion in December last year, when the shares were lower at 440p. (Neil Cumming^, 4^th June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower