Ten years ago, motor distributors were always promising much and delivering little. But that game has changed, or at least the long bull run by the major stocks suggest that must be the case. The fundamental support for the shares has come from two things: first, the strength of the car sales market and, second, the consolidation in the sector which means that almost any company with shares in public hands must be a bid target.
But there are technical issues at work also. Block Exemption changes appear to have given the retail groups more independence from the carmakers. Indeed, when Ford’s PAG (Land Rover, Jaguar, Aston Martin) discovered that Pendragon would have a third of its business in the UK, the company said publicly that there was very little it could do to obstruct or prevent the move – even if it wanted to.
Secondly, the stocks have been re-categorized and revalued. Instead of being in the ‘Motors’ sector of the market, the car dealers are listed as ‘Retailers’. Analysts who research Tesco and Sainsbury now cover Pendragon and Lookers instead of the motor analysts who research GKN and BMW.
Retail analysts like ‘repeatable’ sales revenue and franchised dealers’ tied-in parts and service business rate highly in that business sector. There has been a re-rating of the stocks and the share price as a multiple of earnings has expanded.
So much for the rear-view mirror. It’s great to have had shares that have doubled in the past six months and expanded 10-fold in six years, but is there anything that will maintain the momentum?
Some say not. The cynics reckon there is little evidence of any real financial benefit for the consolidators. If costs don’t fall and margins don’t rise, where does the next level of share price growth come from? There is always initial benefit from banging two listed companies together because the management of the acquired company can be laid off and the headquarters disposed.
Last week, however, there was evidence from Richard Palmer’s European Motor Holdings that things are still OK. The like-for-like profit increase was 10% in a new car market down 5%. He promised “further progress” in the 12 months ahead.
Inchcape reported the purchase of Lind – a move that made it Britain’s biggest BMW dealer and which brought the investors in for more shares.
The next news will be from Caffyns, the minnow of the listed groups. It reports on May 26. The stock market will be eager for reassurance that car retail is still a game worth another roll of the dice.