Should You Sell Darty PLC & BT Group plc To Buy DCC PLC & Entertainment One Ltd Today?

This Fool investigates the prospects of Darty PLC (LON: DRTY), BT Group plc (LON:BT.A), DCC PLC (LON:DCC) and Entertainment One Ltd (LON:ETO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Darty (LSE: DRTY) surged over 15% today — could this be a great time to cash in?

Elsewhere, if you are tempted to sell BT (LSE: BT-A), you ought to be patient at least until its interim results are due at the end of October. In the meantime, you should monitor both DCC (LSE: DCC) and Entertainment One (LSE: ETO). The stock of the latter has fallen almost 10% today…

Low-Ball Bid

Darty hit a 52-week high of 95.25p today as it emerged that it had received a proposal from France’s Groupe Fnac “regarding an all-share offer (…) on the basis of 1 Fnac share for every 39 Darty shares held“. The proposal currently values Darty at 101p per share based on its closing price on 29 September 2015, the group said — adding that the board will explore the benefits of such  a tie-up. Shareholders will be entitled to receive a final dividend of 2.625 cents. A formal offer must be announced by 28 October. 

A low-ball bid financed by equity isn’t exactly the best deal ever, so Fnac could up the ante — I’d sell my holdings today if I were invested, though. If a deal is not agreed, the risk is that your Darty investment will plunge to anywhere between 70p and 80p, hovering around that level for some time based on its growth prospects, core margins and trading multiples. 

Safety

BT is a rather more safe investment, operating in a sector that has inevitably become more volatile in recent weeks on both sides of the Atlantic. Its stock price is getting closer to a 52-week low of 381p; with its 3.4% forward yield, which is a good gauge of risk, I don’t think that BT stock will fall much further, although the enthusiasm surrounding its acquisition-led strategy seems to have vanished.

BT is fairly priced right now but based on its projected growth rate and several other key financial metrics, it is hard to envisage meaningful capital appreciation from a level of 430p/440p, which is well below the average price target from brokers (500p), according to estimates from Thomson Reuters. 

I’ll buy it when I retire, maybe. I want growth right now. 

Growth

I like DCC’s corporate strategy, which combines with a strong portfolio of assets and a clean balance sheet.

Its shares are up 37% this year, and have proved to be particularly resilient in recent weeks. If anything, they look a tad pricey based on forward net earnings multiples of 22x and 20x in 2016 and 2017, respectively. Yet if its management team continues to deliver, earnings and dividends will nicely rise over the period, likely supporting a valuation higher than 5,000p — its stock currently trades around 4,900p, which is 5% below the average price target from brokers. 

I would certainly choose DCC over Entertainment One, which is pursuing a very aggressive growth strategy. Today it announced that it had agreed to acquire 70% of Astley Baker Davies (ABD) for £140m, which implies a rich valuation based on cash flow multiples that are higher than its own. If ABD’s Peppa Pig doesn’t ring a bell, it’s because you do not have kids. 

A fully underwritten £200m rights issue (25% of its market cap) backed the deal, and was arranged by JP Morgan and Credit Suisse. Well, I don’t dislike Entertainment One (my four year-old kid would recommend it following today’s news), and I think its shares are not particularly expensive — but discipline in acquisitions is essential, and clearly the group is pulling out all the stops to chase growth, and that is a strategy that could harm long-term value. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »