Currys PLC (LSE:CURY, Financial), formerly known as Dixons Carphone PLC, is a British electrical and telecommunication retailer.
The company's main brands are Carphone Warehouse, Currys PC World and Dixons Travel in the United Kingdom and Ireland; Elkjop, Elkjop Phonehouse, Elgiganten, Elgiganten Phone House, Gigantti and Lefdal in the Nordic countries; Kotsovolos in Greece; and Phone House in Spain. The key service brands contain Knowhow in the U.K., Ireland and the Nordics and Geek Squad in the U.K., Ireland, and Spain. The company also provides business-to-business services.
Commenting on Currys (at that time Dixon) in Cobas Asset Management's third-quarter 2020 letter, Francisco Garcia Parames (Trades, Portfolio) said, "We are not looking for dark businesses, we are looking for businesses that the market incorrectly values."
Garcia explained further:
"Let's take Dixons as an example, which is the leader in electronics and home appliance retail in six European countries, and among the top five positions in our international portfolio.
The company results from the combination of Dixons itself with Carphone Warehouse, which is the leader in mobile phone retail in the U.K. This merger proved disastrous for shareholders of Dixons, as CW has contractual obligations to sell mobiles with British telecommunications companies. These obligations have resulted in annual losses of 100 million pounds in the last two years, impacting the company's share price. The contracts have already been renegotiated and from the next tax year, 2021/22, they will have a neutral result and hope to have a profitable business thereafter.
Meanwhile, the main business, the sale of electronics, goes from strength to strength, being a leader in both online and physical stores, with market shares of 25/30% in all countries. These shares have been increasing year after year.
It has been shown that the customer needs to touch the product, and 80% visit the website and the store. It is con-firmed that the multichannel model is suitable for these products, and that the leader of this model in each coun-try has a competitive advantage that is difficult to surpass. Such is how the American leader, Best Buy (BBY, Financial), of which we were shareholders a few years ago in our previous stage, is close to historical highs, having multiplied its price by 10 in the last 8 years. It is trading at 15x market consensus estimated profits for 2021.
Dixons meanwhile languishes by trading at approximately 5x its estimated profits for 2021/22, with exactly the same business model as Best Buy.
The company's balance sheet is in excellent shape with low liabilities. It maintains a negative working capital, with inventory mostly funded by vendors via accounts payable.
Currys has had amazing operating and free cash flows and noted in its latest annual report that it has returned to profitability.
The above chart shows the company's cash flow and net income. Note the remarkably high depreciation, depletion and amortization charges which are non-cash. I think the most important metric to focus on is the Core FCF (orange line), which is free cash flow without changes in working capital. This has reached a five-year high of >30% of market cap.
The company's free cash flow and net income is highly variable from year to year, so it is difficult to value the company using traditional discounted cash flow techniques. To handle such situations, GuruFocus has designed the projected FCF method to value such companies. This method indicates the stock is currently selling for less than one-third of its projected free cash flow value.
According to GuruFocus, Currys is only modestly undervalued.
Conclusion
While the share price has not made much progress since I looked at the stock last year, it does pay a decent dividend 3.86%.
My overall impression is that Currys is a strong deep value pick. The risk of permanent capital loss is low as the balance sheet is solid with no long-term debt. The company has an advantageous position in the U.K. and the Scandinavian market and is generating solid cash flow. If Parames/Cobas is right and the company manages to replicate Best Buy's omnichannel formula in Europe, it could be a long-term winner. Cobas continues to add to its position and waits patiently for Mr. Market to recognize its value.
