Right now Dixons Carphone (LSE: DC), with its ultra-low earnings multiple and massive dividend yields, may appear the stock of dreams for investors.
But there is a reason why the electrical giant can be picked up for next to nothing. This was perfectly illustrated by last week’s shocking trading statement and while Dixons Carphone’s latest release may have prompted a fresh share price plunge, I think the business may still have much further to fall.
It’s a classic bargain trap in my opinion, and here is why.
Problems set to persist
After advising that like-for-like revenues rose just 1% in its core marketplace of the UK and Ireland in the 12 months to April, the FTSE 250 business said that it expects trading to remain difficult for some time yet, predicting “further contraction” in its electrical markets at home as well as “market and contractual pressures” in the mobile segment.
As a consequence it expects pre-tax profit to register at £300m in fiscal 2019, down from about £382m in the period just passed.
Dixons Carphone’s pessimistic outlook is no surprise given the economic strains causing shoppers to put the block on buying new fridges, televisions et al, as well as delaying upgrades for their smartphones. Indeed, the business has issued two profit warnings in less than a year and it would come as no surprise to see further downgrades come down the pipe as the broader economic backdrop becomes tougher.
Forecasts not fearful enough
Yet these factors are not baked into broker forecasts right now. The City is predicting a 3% earnings rebound this year, a figure which creates Dixons Carphone’s dirt-cheap forward P/E ratio of 7.1 times.
And what’s more, the company’s muddy profits picture and large debt pile (predicted at £250m as of the close of April) also makes predictions of growing dividends in fiscal 2019 appear a bit of a stretch. After all, the firm kept the full-year payout locked at 11.25p per share last year. And so investors should take the forecast 11.6p dividend for the current year, and the subsequent 6.3% yield, with a large pinch of salt.
A better buy
Given the chances of earnings stress enduring long into the future I see little reason to invest in Dixons Carphone today despite its low valuation. While Greene King (LSE: GNK) isn’t immune to the same pressure on consumer spending, I think the pub and restaurant operator is in much better shape to ride out the storm.
City analysts are expecting earnings to fractionally decline in fiscal 2019, an improvement from the anticipated 12% fall forecast for the previous period. This seems like a realistic target, as customer service and quality improvements help trading to continue improving, and measures to scythe down the cost base pay off.
And in the longer term, I am convinced the brand conversions Greene King is making, coupled with the opening of new pubs across London and the South East, should pave the way for solid earnings growth once the trading landscape improves.
A forward P/E ratio of 9.3 times represents an attractive level at which to latch onto the pub play, in my opinion. And the predicted 33.5p per share dividend, which yields 5.8%, provides an extra sweetener.
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Royston Wild 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.