Consumer electronics retailer Dixons Carphone (LSE: DC) jumped 4.22% in early trading this morning. That came despite publishing a whopping 24% drop in full-year profits, which shows just how negative the market view of this troubled stock had become.
Good call
Investors were bracing themselves with the share price dropping by more than a third in the past year, due to the challenging UK mobile market and data hacking scandal. Presumably, they were pleased to avoid further nasty surprises. Management struck an upbeat note despite the drop in pre-tax profits from £500m to £382m, with group CEO Alex Baldock claiming he was more confident today than when he assumed his new position two months ago.
Talk is cheap, but there were some positive figures in there. Group like-for-like revenues rose 4%, with 2% growth in the UK bolstered by 9% in the Nordics and 11% in Greece. Dixons also generated free cash flow of £172m, if down slightly from £178m, and cut net debt by £22m to £249m.
Trouble in store
Its troubles are reflected in its valuation, with the group trading at just 9.6 times forward earnings. The yield is a forecast 6%, with cover of 1.8. Today, the board maintained its full-year dividend at 11.25p, the same as last year. Given the current generous yield, few investors will be complaining.
Dixons Carphone is battling against declining consumer confidence and intense competition online. It’s set to close 92 Carphone Warehouse stores but will invest more in the shops that remain. It’s not all doom and gloom. It has done well to increase overall group revenues by 3% to £10.5bn, despite a 1% fall in core UK and Ireland ops, and maybe even its core market will pick up if Brexit is ever settled. One for the brave, but high income at a low price is always tempting.
No smoke without fire
British American Tobacco (LSE: BATS) is also battling away in a challenging market, given the decline of smoking in the developing world. Its share price has also dropped by a third in the past 12 months, which will empower contrarians. The stock now offers a forecast yield of 5.4%, covered 1.5 times, and is cheap by its standards, trading at a forward valuation of 12.6 times earnings. As my Foolish colleague Rupert Hargreaves points out, it now offers its highest yield and lowest valuation in a decade.
EPS forecasts have dipped slightly but City analysts are still pencilling in a steady 4% for 2018, rising to 8% for 2019, which look solid to me. Cigarette volumes look set to drop 3.5% this year but British American Tobacco says it is faring better than the wider market, taking share due to its ‘global drive brands’ such as Dunhill and Lucky Strike. It’s also investing heavily in e-cigarettes and other next generation products, while the recent £42bn acquisition of Reynolds should deliver economies of scale.
Both stocks are battling against negative sector trends, hence the high income and low valuations. The best time to buy is now, while sentiment is at its most negative. Just make sure you understand the risks.
