It’s been a tough year for many FTSE 250 shares as fears over the domestic economy have increased. Electrical retailer Currys (LSE:CURY) has been one of the index’s notable casualties, its share price receding 9% since 1 January.
But the company shot higher on Thursday following a better-than-predicted trading release for the first half. And some believe that the under-pressure firm could be about to mount even more impressive share price gains.
Analyst Adam Tomlinson has said that “with the share price circa 30% below early Covid levels, the current valuation remains far too punitive and gives no credit for any earnings upside from here”.
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Tomlinson even suggested that “as a recovery takes hold we see the potential for the shares to at least double, in short order from here”.
At current levels of 49.1p, Currys’ share price trades on a forward price-to-earnings (P/E) ratio of 6.7 times. Is now the time to buy the beaten-down business for my portfolio?
A brief recap
Retailers have been battered recently by the cost-of-living crisis that has sapped consumer appetite. Trading has been especially tough for sellers of big-ticket items like electricals.
This challenging backdrop was highlighted in Currys’ half-year update today. It has said that sales dropped 7% between May and October, to £4.2bn, or 4% on a like-for-like basis.
Underlying revenues in the UK and Ireland dropped 3% year on year. And in the Nordics and Greece, comparable sales dropped 6% and 3% respectively.
Cause for cheer
So what caused Currys’ share price to spike, you ask? Firstly, adjusted earnings before interest and tax (EBIT) rose to £31m, up 7% year on year. It had been expected to drop from the £29m recorded in the same 2022 period.
Despite continued sales pressures, earnings have been boosted by a strong improvement at its Nordic operations. Adjusted EBIT there rocketed to £12m from £3m, as cost-cutting and a favourable product mix boosted gross margins by a whopping 190 basis points.
Signs of improved liquidity has also improved the market mood around Currys shares. Free cash outflows improved by £76m during the first half, to £10m. This was thanks to tighter control on working capital, lower capex costs, and a softer tax bill.
Risks remain
Today’s update has reinforced optimists’ hopes that Currys may be turning the corner. It also reflects a sunnier outlook for the firm’s balance sheet; it had earlier announced the £175m sale of its Greek and Cypriot operations last month.
But it remains too early to claim that victory is afoot. Sales continue to slide and, as tough economic conditions persist across Europe, the top line may continue to crumble. Intense competition will also hamper its ability to march back into revenues growth.
The above disposal will help Currys turn cash positive. But those aforementioned problems mean worries over the balance sheet will persist, casting doubts on when dividends will return. Net debt rose to £129m as of October from £105m a year earlier.
I’m not convinced just yet that Currys’ share price will double. In fact I think it could continue to crumble in 2024 as consumers tighten their belts.
Given the risks it still faces I’d rather buy other cheap UK shares today.
