Its never easy to merge two companies. There are often cultural differences, logistical challenges, and it can take time to deliver the strong growth assumptions set out in the business case. However, Dixons Carphone (LSE: DC) seems to have made a good start since it merged on 7 August 2014. Shares in the company are up 9% since that date (versus 3% for the FTSE 100) and it released an upbeat trading statement this week. Is it, therefore, worth adding to your portfolio?
The First Update
The first update from Dixons Carphone shows that the integration process is going ahead as planned. There are now seven departments serving the business in an integrated way, while sales figures of the stores within stores are showing impressive growth. For instance, while only a very short period and a small sample, the 11stores with stores have delivered faster growth than expected. This is encouraging, and means that a further rollout of combined stores could prove to be successful.
Future Potential
Clearly, the merger between Dixons and Carphone Warehouse was born out of a longer-term view. The company aims to become the home of integrated technology; serving the technology needs of its customers in every aspect of their lives. The market believes that there is strong growth potential in this space, with Dixons Carphone expected to increase its bottom line by 22% in the current year and by 16% next year. Both of these growth numbers, if met, would be hugely impressive and well ahead of the wider market growth rate.
Valuation
As with all potential growth plays, the share price of Dixons Carphone includes a premium. For example, while the FTSE 100 trades on a price to earnings (P/E) ratio of 13.8, Dixons Carphone has a P/E ratio of 17.7. At first glance, this may put off a lot of investors. However, when the P/E ratio is combined with the earnings growth potential of the company, it generates a price to earnings growth (PEG) ratio of just 0.8, which indicates growth at a very reasonable price.
Looking Ahead
Of course, when any companies merge there are a number of risks. As mentioned, cultural differences can be tough to overcome and logistical challenges can take managements focus away from top and bottom line growth. However, with Dixons Carphone making steady progress thus far and its share price seeming to offer strong value, it appears as though the company is well-worth buying at current price levels.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
