The Investment Column: Dixons may be overrated

EVEN BEFORE the market fell in love with Freeserve, the free Internet service provider launched in the autumn, shares in its owner, Dixons, were tipping up.

They have hovered around 500p since 1996, taking a tumble last year after Dixons issued a profits warning. But the arrival of digital television and the rise of domestic computing transformed perceptions of Dixons' prospects, prompting a wave of upgrades for its core retail business.

That, in combination with the excitement over Freeserve, has pushed the shares up to 1564p this year. Analysts estimate the core businesses to be worth 950p to 1050p. But are they really worth twice the value of two years ago?

The largest slice of Dixons' sales comes from Currys, which has been hit recently by tougher competition from Comet, mail-order firms and independent high street electrical shops. Currys' like-for-like sales fell 4 per cent last year; its market share fell 0.1 per cent.

Chief executive John Clare says the problem is largely confined to smaller, long-established stores. New, large format Currys are doing fine. Currys' problem is that it performs well only when the market for white goods is buoyant. When the market shrinks, as now, Currys appears to lack competitive edge.

Dixons stores represent only a quarter of turnover. Like-for-like sales grew 2 per cent on the back of higher volumes as prices plummeted. Mr Clare says the group barely makes a margin on personal computers now, and expects further significant price deflation this year; new PCs are likely to fall to just pounds 299. Still, higher volumes means more sales of peripheral products such as printers and software. Meanwhile, TVs and videos languish at rock bottom prices.

As for The Link, the mobile phone retailer which delivered 80 per cent sales growth following the introduction of pre-pay mobile phones, comparative figures next year will be less impressive. The Link is unlikely to rise much beyond 6 per cent of revenues.

That leaves Freeserve, now adding 50,000 subscribers a week. Freeserve's main costs are its 200 staff, the cost of the content it buys in, and marketing. Revenue is expected to come from flogging tickets, CDs and financial services over the Net. Not even Mr Clare can value Freeserve. Some say it is worth pounds 1.5bn.

Analysts expect pre-tax profits of pounds 255m to pounds 270m this year, with earnings of 41p to 44p per share this year. Dixons has signed up many of the City's leading brokerages to help hive off Freeserve - that should buoy the shares for a bit. But Dixons' core businesses are chasing volumes at the expense of margin, which is hardly a sustainable strategy. There is much expectation in the shares, which at 1,380p look risky.