The Motley Fool

Why I’m backing Dixons Carphone plc for a speedy turnaround

You may have forgotten all about Christmas by now (credit card bills aside) but for Dixons Carphone (LSE: DC) it’s very much a live issue. The FTSE 100 electronics retail group has just issued its trading update for the 10 weeks ended 7 January, which includes the crucial seasonal shopping period. So did it enjoy a merry Christmas, and will this point to many happy New Years to come for investors?

Revenues rise

Dixon Carphone has dialled up some post-festive cheer by reporting its fifth consecutive year of Christmas growth, with revenue up 4% on a like-for-like basis. This included a 6% surge in the UK and Ireland, and 5% in southern Ireland, with a 1% dip in the Nordics (although margins increased). The weak pound acted as a tailwind, with southern European revenues worth 24% more once converted into sterling, and the Nordics up 15%. Overall, revenues climbed 8% in sterling terms.

So Brexit boosts another FTSE 100 company, although with the pound appearing to find its floor this can’t be relied on in future. Group chief executive Seb James hailed “another good Christmas period of growth” with customers still spending on new technology despite significant political uncertainty around the world. He also talked up “truly ground-breaking prices” across both Black Friday and the Boxing Day week sales, which it delivered while maintaining margins.

Winds of change

There was further good news with James anticipating “a meaningful uplift in year-on-year profitability” to £475m-£495m of headline profit before tax for the year ending 29 April 2017, in line with market consensus. James also reported a strong year online in all markets, with significant growth, including in white goods. However, he admitted that patchy availability of larger, higher margin phones and tablets posed a challenge.

Large screen TVs, which James sees as a bellwether for consumer sentiment, showed a solid performance in all markets, James added. All of which sounds good. But markets were unimpressed, with the stock down 5.5% in early trading. This reflects continuing anxiety about the UK consumer in the wake of Brexit, as investors question how long the current debt-fuelled boom can last. Perhaps they also see currency tailwinds turning into headwinds in future, impacting southern and Nordic revenues. The stock is now down 25% over the past 12 months.

The right call

I’m worried about UK consumer spending even though British shoppers have been consistently resilient, and people do love their phones and flat screens. However, the uncertainty is likely to dampen investor sentiment, and this may weigh on the company’s share price for a while longer.

Dixons Carphone warned in December that it was preparing for “more uncertain times ahead“, and its current valuation of 11.47 times earnings reflects that, while offering a tempting entry point. I think that markets are being a little too wary. Earnings per share forecasts look promising, with anticipated growth of 7%, 4% and 7% over the next three reporting years. The yield is a forecast 3.3%, which is below the FTSE 100 average of around 3.8% but more secure than many on the index. Covered 2.9 times, it offers scope for progression. Markets have been tough on Dixons Carphone today, but it looks a good call to me.

Britain is heading for a hard Brexit and the process will begin in earnest once Prime Minister Theresa May triggers Article 50.

This BRAND NEW special Motley Fool report sets out exactly what Brexit means for your portfolio, and how you can take advantage by picking up top company stocks at bargain basement prices.

Don't fret about Brexit any longer but click here to read this no obligation report. It will be yours in moments and won't cost you a penny.

Harvey Jones 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.