Last year, shares in Dixons Carphone (LSE: DC) took a hammering as they fell by more than 50% from a high of 320p, to a low of nearly 150p.
These declines alone were severe enough, but unfortunately, 2017 was the second year in a row the company had experienced such heavy selling. Today the shares are down around 60% from the all-time high of 500p touched at the end of 2015, excluding dividends.
However, after these declines, I believe shares in the UK’s largest electronics retailer are highly attractive.
Should you invest £1,000 in Centrica right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Centrica made the list?
Rebuilding the business
Dixon’s main problem is its mobile business, the electrical side is still robust.
The Currys PC World division reported a 6% increase in like-for-like sales for the first half of 2017 back in December. The Carphone Warehouse side, on the other hand, is struggling. Around 80% of the profits generated by this business come from mobile and SIM card bundles but the problem is, customers are holding on to their phones for longer and more customers are opting to buy SIM cards and handsets separately.
Furthermore, Carphone’s mobile business ties up a lot of capital. The consumer pays a small upfront fee, but most of the phone’s financing comes from the retailer. Up to £1bn is tied up in this side of the business.
So, the billion pound question is, can Carphone successfully restructure the business to meet changing consumer habits?
As the company remains one of the UK’s largest mobile phone retailers, I believe it can. Management has a strong brand name, established relationships with networks and UK-wide distribution to work with, traits that few, if any, peers have.
Nonetheless, the market seems to be discounting these positive factors as it has awarded the company a valuation of just 7.7 times forward earnings. The shares also support a dividend yield of 5.7%, with the payout covered 2.2 times by earnings per share.
Waiting for the turnaround
Another dividend stock that I believe the market is treating too harshly is Pendragon (LSE: PDG).
Shares in the business collapsed last year when the company issued a profit warning thanks to falling sales of new cars in the UK. While this trend has continued, as I noted a few weeks ago, the average age of vehicles on Britain’s roads is now the highest it has been since the turn of the century, indicating that, sooner or later, drivers will have to start replacing older vehicles.
With this being the case, I don’t believe the slump will be a long one. Sooner or later the cycle will change, and investors in Pendragon are being paid to wait for the turnaround.
Today, shares in the company support a dividend yield of 5.5%, and the payout is covered 2.3 times by earnings per share. Meanwhile, the stock trades at a dirt cheap 7.7 times forward earnings.
Using the enterprise value-to-EBITDA metric, which takes into account a company’s debt, the shares are trading at an EV/EBITDA ratio of just 3.2 compared to the broader market median of 11.7.
