Should You Buy The Newly Merged Dixons Carphone PLC?

The merger of Dixons Retail and Carphone Warehouse, two of the UK’s most recognisable high-street brands, is now complete and the duo has formed a formidable force to be reckoned with. The combined group has 3,000 stores across the UK, and the Dixons side of the business currently employs 40,000 people across 14 countries.

Working together

Announced in May, Dixons, the owner of the electrical companies Currys and PC World, and Carphone Warehouse, one of Europe’s largest telecommunications retailers, have combined to form Dixons Carphone (LSE: DC).  The high-street giant now plans to use its existing presence around the country cut costs, drive sales growth and improve customer service. 

For example, seven Carphone Warehouse stores have already been in installed across inside Currys PC World sites across the country, including the all-important Oxford Street location.

A total of 30 Carphone Warehouse stores are expected to be installed within Currys PC World sites by the end of the year. However, Carphone Warehouse must wait until May of next year, before it can roll out more mini-stores within Currys-PC World stores, as this is when the current contract between Dixons and Phones4U ends.

Bright prospects

Still, after this contract ends, the sky is really the limit for Dixons Carphone. The company plans to use its high-street presence to offer a click and collect service around the UK, with customers being able to order everything from phones to kettles and collect them their nearest Dixons Carphone store.

What’s more, the tie up is designed to help customers ride the “Internet of Things” wave.  With mobile and household devices becoming ever more connected, consumers will be able to equip their house with smart objects from one store. 

As one City analyst described it, the company will be able to “deal with increasing levels of connectivity and convergence in technologies with mobile devices an important part of daily life”.

In theory, this should be a highly successful strategy as costs will fall while customer interaction rises.   

Rapid growth

It is expected that around £80m in cost saving synergies will be achieved from the merger. The enlarged group will also be able to negotiate improved buying terms with key suppliers. As a result, some estimates are calling for Dixons Carphone to achieve an average 11% growth in earnings before interest and tax per annum over the next five or so years. This growth will work out at around 15% per annum growth in earnings per share.

Indeed, current City estimates are suggesting that the merged company will report earnings per share of 21p during 2015, followed by earnings of 23p during 2016. This puts the company’s share on a 2015 P/E of 15.9 and a 2016 P/E of 14.4, which does not seem to be overly expensive, considering the earnings growth the company is targeting.

Current forecasts also indicate the Dixons Carphone will offer a dividend yield of 2.1% during 2015 followed by 2.3% during 2016.