Dixons Carphone a contrarian buy call? DC

Dixons Carphone’s (LSE:DC) primary brands include Currys PC World and Carphone Warehouse in the UK & Ireland as well as a number of brands in the Nordics and Greece. After posting record annual returns in June, the group’s trading update on 24th August reported overall revenue growth of 6%.

However while sales in Greece and the Nordics continued strong growth, its Carphone Warehouse business reported a 24% reduction in revenue due to a ‘more challenging UK postpay mobile phone market.’ The company primarily blames currency fluctuations, making handsets more expensive while ‘technical innovation has been more incremental’. This has resulted in customers holding on to their phones for longer.

Profit range

Over the past year, Dixons Carphone has lost over half its value and is now just a third of its all-time share price high of £5.06, hit at the beginning of 2016. With today’s Market Cap standing at 1.95B the company has a current P/E ratio of only 6.7.

Taking into account the disposal of their ‘The Phone House Spain’ business, the company has forecast its headline Profit Before Tax for 2017/18 to be in the range of £360m to £440m. Last year the Headline Profit Before Tax was £501m, and so taking the average forecasted figure for 2017/2018 of £400m equates to a 20% drop. That gives a back-of-envelope forward P/E of 8.4 at today’s share price of £1.68 per share.

It’s also worth noting that Dixons Carphone now derives more than half of its revenue and profits from services, moving it further away from the retail sector and utilising its stores to provide mobile phone repairs and a number of services through its knowhow clinics, including repair of laptops through to white goods, Tech support and advice. Four broker ratings have been given since the trading update and these range from target prices of £1.80-£2.80 with two giving an ‘outperform’ recommendation.

Disconnected Share price

From a technical analysis point of view, the RSI is indicating the share is very oversold. On the day of the profits warning the price bounced strongly off £1.54 to close at £1.80. Since then the price has drifted back down, testing £1.63 twice and a symmetrical triangle pattern has formed. Those bullish on a recovery from this oversold position might expect the breakout to head upward with immediate resistance at £1.90. A bearish breakout of the triangle might result in a retest of recent lows but based on the current fundamentals of the business I believe there’s a decent chance of a double bottom at £1.54 if £1.63 and £1.60 fail to offer support. Finally, as unexplainable as it is, price gaps on the chart nearly always get filled and this bodes well for any believers, with a big gap to £2.35 and another at £2.65 currently ‘unfilled’.

Better reception?

Looking forward, the Interim results to be announced on the 13th December will give the next insight on performance, and before that, it’s hoped that the release of the much anticipated Apple iPhone 8 model will give the market an injection. I wouldn’t be surprised if we saw a modest recovery in the share price ahead of the interims and a buy below £1.75 may offer good potential upside, with a short term target of £2.00-£2.20, (or even £2.35 should the gap need filling!)

Disclosure

The author of this piece owns stock in Dixons Carphone.

The author of this piece has not been paid for writing or publishing this article. It is independent analysis.

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