Currys PLC (LSE:CURY, Financial) (DSITF, Financial), formerly called Dixons Carphone PLC, is a European omnichannel electronics retailer with a market cap of 737.90 British pounds ($895.95 million).
Currys' 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, Francisco Garcia Parames (Trades, Portfolio) said in Cobas Asset Management's second-quarter 2022 letter:
"Our main cyclical position is Currys Plc, formerly Dixons. This company, which we have talked about on numerous occasions is the number one electronics retailer in the U.K., the Nordic countries and Greece. Because of the type of products it sells, which are discretionary purchases (TVs, household appliances, computers, tablets, etc.), it is a company whose business is influenced by the economic cycle and consumer confidence. Due to this cyclical character, Currys´ shares have fallen more than 50% from the highs of £1.60 per share seen in 2021 and almost 40% so far this year.
The possibility of a recession occurring and therefore Currys sales and earnings suffering in the short term is real. With the stock trading at less than 5x our normalized earnings, we believe the market is already more than discounting that scenario. This is evidenced by the fact that following the company’s latest results, published in early July, in which it significantly lowered its sales and margin estimates due to economic uncertainty, the share rose by 10%. The price is around £0.70 per share, a figure not far from the minimums it made during the worst moment of the pandemic, when uncertainty was certainly greater than in the current scenario. Since then, the company’s financial situation has improved and it now has net cash, has solved its problems with the cell phone business, is gaining market share and buying back shares. Currys’ results are likely to suffer in the near future due to weak demand for its products, but in the medium to long term the company’s prospects remain intact. It is a company protected by barriers to entry, which will generate cash even in the worst circumstances and is likely to gain market share as its weaker competitors are unable to withstand the difficult times ahead. We believe that the market has over-penalized it and that is why it remains an important position in our International Portfolio"
Cobas owns over 90 million share of Currys, representing 8.5% of the company. Francisco Parames is the head of Cobas Asset Mangement which is based in spain which follows a value oriented investing philosophy. Parames is known as the "Spanish Warren Buffett (Trades, Portfolio)".
Currys' balance sheet is in excellent shape with low long-term debt of£80 million. It maintains a negative working capital, with inventory mostly funded by vendors via accounts payable.
Below are some details of Currys' balance sheet as of April 2022.
The company has excellent operating and free cash flows and is now solidly profitable.
The company's free cash flow and net income are 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 free cash flow method. This method indicates the stock is currently far below its projected FCF value of £4.00.
However, note that the GF Value chart is showing that the company may be a value trap because it is trading so far below intrinsic value.
I believe that given the solid balance sheet and huge cash flow generation, Currys has a large margin of safety and can make it through to the next economic cycle, when hopefully business will improve.
The risk of a permanent capital loss is low as the balance sheet is solid with very little long term debt. The company has a good market position in the U.K. and the Scandinavian nations. Investors also get a solid 4.8% dividend yield while we wait for price to catch up with value. The company is even buying back stock.
Parames had previously commented that Currys' omnichannel business model is similar to that of the U.S. retailer Best Buy (BBY, Financial). In 2020, Parames commentd on Currys as follows:
"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 country 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."
If Parames is right and the company manages to replicate Best Buy's winning omnichannel formula in Europe, it could be a multi-bagger in the long term.
