Carphone comfortably beats expectations and its shares look reasonable value.
With its planned demerger of its telecommunications and retail divisions plus a nice rise in earnings, investors will have been eagerly awaiting Friday's interim results announcement from Carphone Warehouse (LSE: CPW). They will not have been disappointed.
Half-year figures came in ahead of expectations, prompting the company to raise its full-year forecasts and to reiterate that the demerger is going ahead as planned -- banking facilities have been agreed, and everything is still on schedule.
Revenues grew by 13% to £789m, but more importantly, pre-tax profit soared by 88%, to £75m, and earnings per share rose by the same proportion, to 6p.
Full-year earnings expectations have now been cranked up a notch, to between 14p and 15p per share, which is comfortably ahead of analysts' expectations of 13.6p. The same analysts also had 15.5p pencilled in for 2011, and we should probably expect them to raise that now.
Great cash flow
According to CEO Charles Dunstone, Talk Talk, the company's telecommunications division (which will be a separate company post-demerger), had a particularly good six months, adding 124,000 new subscribers during the period. The division also turned round its cash flow position, generating £75m of operating free cash flow this time against an outflow of £8m for the first six months of last year. Full-year free cash flow is expected to amount to £120m (even with an additional £10m of capital expenditure).
Talk Talk is now the UK's second largest broadband provider, behind BT Group (LSE: BT-A), after having acquired Tiscali in July this year.
The retail division, Best Buy, half-owned by the American firm Best Buy Electricals, also had a good six months, with like-for-like revenues growing 3.1% (on an actual currency basis), and with improvements in cash flow and working capital. Net free cash flow of £50m is expected for the full year.
Back to the high street
The first of the demerged Carphone Warehouse's new "Big Box" megastores are expected to be opened in Spring 2010, suggesting that the company is fairly confident that the worst of the high street woes are well behind us, and that consumers with cash to spend are starting to return.
If Carphone Warehouse, always a canny observer of the retail scene, is indeed so confident, that may well start to rub off on others, which should help the whole of the retail sector. The Christmas shopping season should present us with an early proving ground, especially as competition in the smart phone business hots up.
Apple's iPhone is now available on O2 and Orange networks, and Tesco (LSE: TSCO) has announced that it will also offer it. With others launching similar products and services, like Vodafone's (LSE: VOD) Vodafone 360 offering, a fair bit of the new business will surely go the way of Carphone Warehouse -- despite being able to compare offerings and subscribe online, a lot of people still like to walk into a shop and harangue an assistant into explaining the best deals.
Buy the shares?
So what is Carphone Warehouse looking like as an investment?
This week's figures show a company that is in control of its operations, has a clear forward strategy, and has the expertise needed to bring it to fruition. And net debt isn't too startling either -- even at the stated £361m, that's still relatively low compared to its half-year revenues of £789m and market cap of nearly £1.8bn.
It was only the acquisition of Tiscali earlier this year that was responsible for debt being even that high, and the company's focus on cash flow suggests that it would be able to get this debt down fairly quickly if need be -- and even if not, interest payments are easily covered.
It's perhaps surprising that the share price didn't respond more enthusiastically, gaining only 1% as I write. Forward P/E for the full year is about 13.3, based on the new full-year expectations. And if 2011's earnings are similarly uprated from current forecasts, we should be looking at a P/E of under 12 for that year.
For a long-term investment in a quality company, I think that's a good price -- even if it's perhaps not a screaming bargain.
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