Dixons Carphone shares fall as Morgan Stanley questions value

Dixons Carphone shares fall as Morgan Stanley questions value

Dixons Carphone’s share price tumbled by over 5% today after banking giant Morgan Stanley downgraded the retailer’s stock rating, pointing to continuing ‘structural’ pressures’ on independent mobile phone retailers, which saw the demise of Phones 4u last year.

In a broker's note Morgan Stanley said the shares were significantly overvalued, having risen by nearly a fifth since the merger of Dixons Retail and Carphone Warehouse last August. Morgan Stanley said the valuation - shares are trading at 17 times earnings - is now too expensive for a company which is ‘not a growth business’, downgrading the stock from ‘equal weight’ to ‘overweight.’

The note said: ‘While we anticipate strong earnings per share growth over the next couple of years, we do not think Dixons Carphone merits its current growth multiple.’

It added: ‘Structural pressures have not gone away. We continue to believe that Carphone Warehouse entered the merger primarily for defensive reasons, with the sudden demise of Phones 4U highlighting the pressures on independent mobile handset retailers. Dixons, too, remains reliant on supplier support, which could lessen as synergy benefits come through.’

Phones 4u collapsed in September last year after Vodafone and EE decided to terminate their trading agreements with the retailer. Dixons Carphone, which has long term agreements with all the UK network operators, has pledged to pick up the lion's share of Phones 4u's customer base.

Morgan Stanley did not rule out future strategies raising Dixons Carphone’s stock rating. The note added: ‘Whilst we believe that the current Dixons Carphone investment case does not merit the current share price, we cannot rule out further value-creating deals transforming the investment case, yet again, in the future.’

Other retail analysts continue to back Dixons Carphone. Research analysts at Bank of America Merrill Lynch issued a briefing note last week upping their estimate of earnings per share for Dixons Carphone in 2015/16 by 2%-3%.

It pointed to Dixons Carphone’s increased share of the mobile market following the demise of Phones 4u, the continuing rise in data usage, strong contract sales, the performance of Carphone Warehouse store-in-stores and record Black Friday sales as definitive factors driving growth

The note added: ‘We believe Dixons Carphone should benefit from its dominant position in the UK/Nordics, increasing profitability from £100m of synergies by FY18E, improving trends in Sweden and market share opportunities in the Nordics, and the rollout of Connect World Services (CWS).

‘Its competitive positioning should help it maintain its leading position in both the consumer electrical and telecommunication retail segments.’

Dixons Carphone shares rallied later in the day, closing 10.5p down at 419.4p, a fall of 2.44%.

The retailer declined to comment.


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