Is it time to hang up on Dixons Carphone?

Looking at Dixons Carphone at 425p, as we approach the Christmas consumer season and after the share price has fallen 13% from its August high of 490p.

Sheafing (a good old agricultural metaphor that ought to be used more often) through charts in the pursuit of market gold, I note that our old friend (insofar as you can befriend something as wild and feral as a share) Dixons Carphone (DC.) has come down 13% from its August high of 490p, to 425p last seen. Is it a buy? Two share price chart readings suggests it is. The three-month chart shows it breaking out from that recent downtrend from the summer high; and the three-year charts shows it sitting on a long-term upward support level, suggesting share price progress from here. Having read the tea leaves, I turn to the crystal ball of more fundamental conclusions. But first a little factual history…

You will recall that this company is a merger of Dixons Retail and Carphone Warehouse which was a co-operative response to the very tough competitive conditions in the market place for the kind of electronic staples these two companies sold. Margins were low and there was a lot of sense in trying to raise them by cutting out two lots of costs. Good old fashioned merger economics that we can all understand. And it has begun to work, doing wonders for the share price of the newly fused entity baptised Dixons Carphone.

Although the accounts for the first half of the current year are too uneven and untidy for analytical purists, who like to compare apples with apples (the accounting period to the 2nd of May 2015 is compared with an evidently shorter period to March 31st 2014), they were nevertheless dramatically encouraging evidence of progress. You could not put the results down simply to the choice of accounting date. Sales revenue was shown to have risen by an enormously useful 152% to £4,914 million; operating income climbed by 281% to £328 million; and net income before extra cost items (no doubt including the costs of the merger) was up 329% (or 181% when such extra cost items are taken into account).

In other words, at that stage, operating margins in the operating period to 2nd May had been raised to 6.6% from 4.4% and underlying (before extra cost items) net margins had been raised from 2.9% to 5%. The results of merging were clearly showing through.

Equity is shown as worth £2,763 million; 57% of the current market cap (or 240p a share or thereabouts) but bearing in mind those are intangible assets because of the post merger goodwill figure of £2,983 million sitting in the balance sheet. That should also be taken into consideration when identifying the equity gearing ratio as only 17%. That is not the same as borrowings supported by hard assets. Nevertheless, it does mean that compared with many companies Dixons Carphone is less exposed to finance costs, which flatter earnings growth when thing are going well, or destroy it when things are going badly and cost of borrowing rises.

Naturally, I have checked out the latest market consensus estimates for earnings and dividend growth this year and next. They show that there is earnings growth for this year but it is only estimated at 5% – not enough to make the accompanying prospective and estimated price to earnings ratio of 14.8 for the current year look cheap. So does the consensus earnings estimate for next year lend attractions in valuation terms? Not really! The market consensus is for estimated earnings growth of 11% next year, but the market seems to be paying for about 13% earnings growth to judge from the forecast prospective PER for 2016 of 13.3 times. The forward estimated annual dividend yields of 2.2% and 2.5% are about twice covered by estimated earnings for each respective year.

In reaching a conclusion about this share now, it is impossible to say that it looks obviously cheap on forecast earnings to price. It does look interesting because of its low price to book value, as outlined above, but bearing in mind that the balance sheet assets included an overwhelming goodwill item.

The share price should benefit from a Christmas rally for consumer stocks, particularly as private sector wages in the UK seem to be rising against a background of still low inflation and as consumers start to divert their summer spending on holidays and leisure towards the high street and presents. The shares do not seem fundamentally alluring – unless the consensus numbers prove too conservative – so I make them a share to hold because we approach the season when retail shares tend to attract interest.