Interactive Investor

Insider: this car dealer looks like a great recovery play

9th August 2021 10:15

Graeme Evans from interactive investor

Our stocks writer considers the merits of one of the country’s big car dealership groups.

With used car prices still rising, the chief operating officer at retailer Lookers (LSE:LOOK) has followed up on the latest of his firm's four upgrades to 2021 forecasts by buying £35,000 of shares.

Duncan McPhee, who has over 25 years’ experience in the motor retail industry, made his purchase on Wednesday at prices of between 68p and 70p, which is near the highest level for the dealership since its shares were restored to the stock market in January.

The run of profit upgrades by Lookers follows a remarkable period for the industry, with strong levels of customer demand and disruption to new vehicle production meaning that second-hand vehicles are selling for an estimated 14% more than they would have done a year ago.

Auto Trader Group (LSE:AUTO) said there was little evidence of a “price ceiling” for vehicles up to one year old, with a spot check last month finding about 700 used cars on its platform were priced higher than their brand-new counterparts.

Furthermore, one in five nearly new cars on Auto Trader are within 10% of their new car equivalents.

This has fed through to much higher margins in the retail industry, while forecourts are also busier with people with lockdown savings to spend or who want to buy a car because of their reluctance to use public transport after the pandemic.

The most recent upgrade to forecasts by Lookers came at the end of July, when it reported outperformance of the new car market and used car unit sales up 38%.

This meant profits for the first half of the year will be about £50 million, compared to the £36.1 million underlying loss the previous year.

Chief executive Mark Raban said Lookers had delivered an outstanding performance but warned that Covid-19 was still causing disruption and uncertainty.

Analysts at Zeus lifted their profits forecast for this year by 19% to £60.8 million, although with ongoing supply shortages and cost inflation they do not expect Lookers to sustain the current level of performance going into 2022.

Lookers is currently trading at 5.5 times 2021 earnings, which increases to 6.3x for 2022. Liberum believes this is too cheap after the broker reiterated its 105p price target.

The shares are broadly unchanged since April despite the profits momentum, a trend in line with the performances of other stocks in the sector including Pendragon and Vertu Motors.

As well as the continued uncertain outlook, the industry also faces increased competition from fast-growing online operators such as Cinch and Cazoo.

Liberum analyst Sanjay Vidyarthi said: “We continue to see Lookers as an attractive recovery play in the sector, preferring it to Pendragon, albeit Vertu remains our top pick amongst the franchised dealers.”

Lookers has turned the corner after an investigation into the overstatement of profits last year caused the publication of its accounts to be delayed and shares to be suspended.

They resumed trading in January at 22p, while an investigation by the Financial Conduct Authority into sales processes between 2016 and 2019 was closed in March.

Indivior and FirstGroup

Directors at addiction treatment firm Indivior (LSE:INDV) and transport business FirstGroup (LSE:FGP) have bought shares as confidence in the FTSE 250-listed pair shows signs of improvement after a rough ride in recent years.

The £50,000 purchase of Indivior shares by chairman Graham Hetherington was made at 171.2p, which compares with a price of 123p seen in March and 148.6p before half-year results at the end of July.

The figures included an upgrade to Indivior's full-year sales guidance for the injectable anti-opioid treatment Sublocade after four consecutive quarters of double-digit growth, as well as signs of market share stability for Suboxone in the face of generic competition.

Shares slumped from almost 500p to 30p by 2019 after the company was indicted in the US over an "illicit nationwide scheme" to drive prescriptions of Suboxone.

At FirstGroup, recently appointed non-executive directors Jane Lodge and Peter Lynas bought shares in the company for the first time last week.

Their moves follow the long-awaited disposal of First Student and First Transit for £2.25 billion in the US and full-year results showing a resilient performance from UK bus and rail operations.

It is planning to return a bigger-than-expected £500 million to shareholders this autumn but has also announced that chief executive Matthew Gregory is to stand down after three years overseeing a substantial overhaul of the business.

FirstGroup shares have risen from 73p in mid-July to close last week at 90.05p, with Lodge making her £13,000 purchase at 87.1p on Thursday and senior independent director Lynas doing so on Monday at 85.5p for a purchase worth £51,300.

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