Why I’m avoiding this Neil Woodford-backed growth stock

Paul Summers runs the rule over the latest set of numbers from this mid-cap retailer.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors in car retailer BCA Marketplace (LSE: BCA) have endured a roller coaster ride since the company first listed in 2015. That’s not to say the owner of the webuyanycar.com brand is running short of admirers. Star fund manager Neil Woodford is a fan with the company occupying a place in both his Equity Income and Income Focus funds. 

With full-year results out this morning, does the £1.5bn cap deserve to be in more investors’ portfolios? Let’s check the numbers.

Strong results

In the 12 months to the start of April, revenue at BCA rose 76% to £2.3bn, adjusted EBITDA came in 38% higher at £135.6m and operating profit rose by 350% to £74.3m. 

Over the period, the company achieved re-marketing volumes of 956,000 and 347,000 units in its UK and International divisions respectively. WeBuyAnyCar sold 194,000 units (up 12.8%) and purchased its one millionth vehicle. As part of its desire to become “a seamless and efficient one-stop shop for the passage of vehicles throughout their lifecycle,” BCA also acquired refurbishment services companies Paragon Automotive Ltd and Supreme Wheels Direct during the reporting period.

Shares in BCA were up just over 4% in early trading. So, given today’s encouraging figures, why am I not a buyer?

It’s mostly to do with the amount of debt on the company’s books. At the beginning of April, this stood at £261.5m — a 53% rise on the previous year. While this can be justified by BCA’s high growth strategy, it’s not something I’m completely comfortable with given the cyclical nature of the industry in which the business operates.

A deeper look at BCA’s fundamentals makes me want to avoid the shares even more. Operating margins and returns on investment have become as erratic as the share price. Elsewhere, dividend cover on the 3.4% yield — at 1.35 times profits — is adequate but hardly the sort of security most income investors will be looking for. Today’s announcement of a 12.5% hike to the full-year payout may please some, but is BCA trying to be all things to all people?

At 22 times 2017 earnings, I think the shares are too expensive to warrant consideration at the current time.

A safer bet?

A better pick in the industry, in my opinion, would be Lookers (LSE: LOOK).

In its most recent update, the £480m cap motor retailer reflected on what had been a strong period of trading for the company. In the quarter to the end of March, it delivered a 17% increase in gross profit on new car sales and 9% on a like-for-like basis. For used cars, the figures were even better — up 23% and 17% respectively. There was also an 18% increase in gross profits on after-sales (9% like-for-like).  

Looking forward, the company has made what it describes as a “pleasing start of the year” and believes results for 2017 should be in line with management expectations.

With significantly less debt on is balance sheet and “substantial headroom” in its banking facilities to fund further acquisitions, the Manchester-based business looks a decidedly less risky option — in my opinion — than BCA. While operating margins are typically low for companies operating in the industry (and Lookers is no exception), returns on capital have been consistently decent. The forecast 3.5% dividend yield is also easily covered by profits.

Trading at just eight times earnings, I think there’s sufficient value in the shares to make Lookers worth a gander.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »