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Is Dick Smith Holdings Ltd at bargain prices?

When it comes to consumer electronics, Dick Smith Holdings Ltd (ASX: DSH) is one of the best known brands in Australia, having been founded in the late 1960s as a humble car radio installer.

Since that time it has grown to close to 400 store locations in Australia and New Zealand, and has expanded laterally into different store formats that sit alongside its core Dick Smith offering.

But the recent results of the company were met with serious disapproval by the market, and shares fell by over 30% after reporting season. But the market is well known for overshooting on the downside, particularly when the overall environment is a volatile one, as it has been in the past few months.

In these situations, investors are quick to “cash in their chips” and take money off the table and park it in cash, rather than allow overall equity market volatility to shake their portfolio. But looking at only the company specific factors, the sell down of Dick Smith appears to be overdone.

Why the selldown?

In a nutshell, the market was disappointed by the same-store sales growth figures of Dick Smith relative to its major rival, JB Hi-Fi Limited (ASX: JBH). Analysts had factored in a short-term “sugar hit” to retail company share prices as a result of the budget stimulus measures. But it was clear that Dick Smith did not benefit to the same extent as JB Hi-Fi.

Taking a step back though, investing is a long term endeavour, and while a short term bounce in sales figures based on one-off factors would have been desirable, it is not a good indicator of the overall strength of the company.

The upside factors

There are several reasons that there is more upside for Dick Smith going forward than downside.

The first is a sustainable 8% dividend yield, which goes higher if you are able to gross up the dividends. This dividend appears sustainable as the capital expenditure requirements of the company are well flagged and manageable. Also, profits are not expected to fall – remember, the market sold down the company because of lower profit growth, rather than a decline in profits.

Dick Smith also has scope to continue to grow profits through a store rollout option. In particular, it has the option to grow its Move branded store network. Move stores sell higher margin electronics and accessories which target consumers with high disposable incomes and the desire to personalise their gadgets.

It also has one of the best online offerings for any consumer retailer, with an extensive email database of customers, advanced segmentation and tailored offers for customers.

The company is also adjusting for the falling Australian dollar better than its peers with a well established, high margin, own brand accessories and hardware product offering protecting margins.

There is an old investing saying that goes “when the time comes to buy, you won’t want to”. In the wake of heavy share price falls, that is exactly the feeling that most investors would have towards Dick Smith.

But looking past the short-term factors could result in a very Foolish reward for those willing to take the plunge.

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Motley Fool contributor Ry Padarath has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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