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Is the Dixons Carphone share price a falling knife to catch after plummeting 20%?

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Shares in electrical and telecommunications retailer Dixons Carphone (LSE: DV) fell heavily in the early trading this morning as the company released an update on recent trading and provided a rather bleak outlook for the new financial year. 

Does an already-low valuation, steady dividend and tough-talking new CEO mean the shares are now a steal? Let’s take a closer look.

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Profit warning

Today’s numbers were something of a mixed bag. While group like-for-like revenue grew 3% in the 16 weeks to 28 April, only a 1% rise was recorded in the UK and Ireland. 

Overseas, trading was a little more positive, with growth of 8% and 10% seen in the Nordics and Greece, respectively, although these were lower than in Q3.

Taking these latest quarter numbers into account, reported revenue for the whole company is up 3% year-on-year. Not outstanding, but not altogether awful.

So, why the sharp fall in the share price? It all comes down to profit.

All told, Dixons Carphone is now predicting pre-tax profit of roughly £382m for the year — in line with market expectations. However, this is likely to fall to “around £300m” in 2018/19 with more pain forecast in the UK electrical market not helped by cost increases, such as the National Living Wage. Its UK Mobile division is also expected to suffer as consumers refrain from updating their handsets as regularly as before.

With an outlook like this, it’s no surprise that new CEO Alex Baldock chose to be brutally frank with owners. He stated that the large-cap was “nowhere near” working to its strengths, adding that “nobody was happy” with Dixon Carphone’s recent performance.

On a more positive note, he did remark that the company’s issues were “all fixable” and that a focus on areas such as data analytics, marketing, digital, services and technology were all important to Dixons’ recovery.

In an attempt to turn things around, the business will now focus on “fewer, bigger initiatives” and correct recent underinvestment. Satisfied with its performance in international markets, efforts will be directed on improving trading in the UK with an injection of £30m to give staff “the right tools and the customer an improved experience“. 

Bargain buy?

I’ve been bearish on Dixons Carphone for some time now and, to a point, remain so. The sheer level of competition faced from online rivals coupled with the fragility of consumer confidence can’t be underestimated.

That said, today’s ‘kitchen-sinking’ of bad news does feel like a genuine attempt to draw a line in the sand.

While today’s huge share price fall will be hard to take for those already invested, it’s likely that bargain-hunters will now become even more interested in the shares. Indeed, a forecast price-to-earnings (P/E) ratio of just 9 before this morning suggested that a lot of negativity had already been taken into account by the market. The fact that the full year dividend was maintained at 11.25p per share may even attract patient income investors.

As Marks & Spencer recently showed, effective action by management is often rewarded by the market.  More details on how the company intends to turn itself around are expected next month with a full plan of action due in December. Since expectations are now very low indeed, I think any hint of an improvement in trading could see Dixons Carphone arrest its share price decline.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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