Fool's Eye View

[ June 12, 2000 ]

Psst -- Wanna Buy a Motor?

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- I am sure that you have all heard the headlines on the news bulletins today -- "New car prices to fall by 40%" -- which have been prompted by the imminent publication by the Trade and Industry secretary Stephen Byers of new rules that will govern how new cars are bought and sold in the UK.

Basically, the Secretary of State is likely to make an order to prohibit suppliers from discriminating by price between fleet customers and dealers willing to buy a stock of new cars outright, and from discriminating in the terms on which new cars are supplied to contract hire companies according to whether the companies' end-customers are fleet or private customers. It is also intended that suppliers will be prohibited from seeking to control the prices at which dealers may advertise new cars. Finally, suppliers will be prevented from making agreements which cause dealers to pre-register cars, and they will be forced to publish information about the supply of cars that they have pre-registered.

I am sure that over the next few days we will see endless analysis of how this ruling is going to impact on the price of new cars in the UK, and hopefully the car-buying public will benefit through lower prices. Hopefully, too, this will result in the end of the daft practice of forcing UK car buyers to buy their new cars from a European dealer rather than a UK one if they want the best price. But does this offer any opportunities for us as investors?

It is pretty clear that a falling car price will be bad for car manufacturers. But what about that other link in the chain, the new car dealer; what will it do for them? My strongly held view is that reduced car prices can be nothing but beneficial to car dealers. New car buyers have been running their old cars a bit longer waiting to see what happens, and used car buyers have been driving hard bargains before they have been willing to part with their hard earned cash. Once the "pricing problem" has been sorted out it is quite likely that there will be a real mini-boom in car sales as the pent-up demand for cars is satisfied.

So who are the companies that may be poised to benefit from this? The top 5 motor dealers, by turnover, in the UK are:

Pendragon (LSE: PDG)
Lancaster (not quoted)
Reg Vardy (LSE: VDY)
Sanderson Bramall (LSE: SDSM)
Hartwell (not quoted)

Other quoted motor dealers include, Inchcape (LSE: INCH), DC Cook (LSE: CDC), Synter (LSE: SYT), Ryland (LSE: RYG), HR Owen (LSE: HRO) , Perry Group (LSE: PRY), European Motors (LSE: EMH) and Reg Vardy (LSE: VDY) Dixon Motors (LSE: DXM), Lookers (LSE: LOOK), Arriva (LSE: ARI), and Quicks Group (LSE: QUIK).

These companies have really massive turnovers compared to their market capitalisations, or to put it another way, they have very low price to sales ratios (PSRs). Of the quoted companies the following table is sorted by sales:

              Turnover   Profits    Share Price 
Pendragon     £1,754m    £19.2m        142p
Reg Vardy     £1,182m    £27.2m        264p
Sanderson B     £843m    £17.2m        143p
Ryland          £674m    £ 3.0m         42.5p
Dixon           £660m    £ 8.6m        159p
Lookers         £521m    £ 4.8m         75.5p
Quicks          £600m    £ 4.6m         51.5p


                 EPS        PSR      P/E
Pendragon        21.3p      0.05     6.6
Reg Vardy        33.4p      0.13     7.9
Sanderson B      30.7p      0.05     4.7
Ryland            7.1p      0.02     6.0
Dixon            19.3p      0.09     8.2
Lookers           6.6p      0.05    11.4
Quicks            8.8p      0.03     5.8

* Inchcape (LSE: INCH), which is the biggest quoted company in the sector, generated most of its sales and profits outside the UK so has been ignored in this article.

So what is likely to happen?

Over recent years size has proved to be everything, and we are likely to see a continuing consolidation in the industry: while there are 15 quoted companies, there are hundreds of unquoted new car dealers, some operating from just one showroom. If the likes of Pendragon will be allowed to buy cars from the manufacturers in their own right and sell them on to retail customers at prices of their own choosing, their buying power is likely to mean that the smaller retailer will be squeezed out of business, or be gobbled up by the bigger players.

The dividends being paid by these companies may also make them attractive, on the assumption that they are able to maintain the dividends in the future; for example:

Company     Dividend Yield
Pendragon       9.3%
Reg Vardy       3.8%
Sanderson B     5.0%
Ryland         13.8%
Dixon           6.6%
Lookers         8.7%
Quicks         15.5%

All of these companies are currently forecast to increase their earnings per share in the next year; despite this the share prices of most of the companies are still on a downward trend. Should this sector really be so unloved? People will continue to want to buy new cars, and if UK prices fall to European levels then most people will return to buying their cars in the UK. The dealers are the middlemen in this game, and if they are given freedom to negotiate the price of the cars themselves they may well be able to improve the measly 2 or 3% margin they achieve on sales; just a small improvement for Pendragon, who make only about 1% on sales, would make a big difference to the bottom line.

Which of these companies is worth looking at in greater detail? Difficult to say without much more research, but if you are looking for income a further investigation of this sector may be worthwhile!

Related Links

• Buying a car?
• Buying a Car discussion board
• Competition Commission
• Department of Trade and Industry
• Auto Industry website from the DTI