1 growth stock I’m holding for the next decade

This stock looks to me to be one of the best long-term investments around today.

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Cambria Automobiles (LSE: CAMB) is one of the cheapest stocks on the market. Shares in the company currently trade at a P/E of 6.7, around a third below the five-year average of 9.3 and less than half of the UK market average of 14.1. 

However, many believe the company deserves this low multiple because it operates in a highly cyclical industry

Today’s full-year results from the company show just how cyclical the business is.  

After reporting a record operating profit of £12.4m last year, operating profit declined by 4.8% for the year to 31 August. Even though revenue for the period rose by 4.9%, most of this growth came from the group’s aftersales division, which reported revenue up 9%. New vehicle sales declined 11.7% in the period, while used vehicle sales slid 6.1%. Overall, earnings per share dropped 0.9%. 

As bad as it seems? 

Many City analysts believe there’s more pain ahead for the UK car sales industry. 

Indeed, analysts expect falling consumer spending coupled with high levels of debt (the UK borrowed a record £31.6bn in 2016 to buy cars) will mean customers delay purchases or upgrades. 

To a certain extent, these concerns have become reality. Cambria’s results show that new car sales are falling. Nonetheless, sales are falling off a high base. 

For example, even though new car registrations are projected to fall by 4.5% for the full-year to 2.57m, this number is still 10% above the mean average of 2.35m for the past 17 years — according to Cambria’s data. 

This is why I’m positive on the outlook for the company. Even though the market seems to have written off the business, the current operating environment does not seem to be as bad as its valuation suggests. 

Also, Cambria has a record of creating value for shareholders, and even though the car market is coming off the boil, I expect this to continue. 

Creating value for shareholders 

I believe that its value lies on its balance sheet. Over the past seven years, the company has grown book value per share from 19.5p to 50p as reported for the year to August 31, a compound growth rate of 17%. Of the total 50p per share, £45.2m is freehold property, which is funded with £17m of debt. There’s also £23m in cash giving net cash of £6m. In other words, the balance sheet is rock solid. 

With a market value of £62m and a book value of £50m, the market is ascribing almost no value to the underlying business. 

What about the outlook

So, Cambria looks cheap but what about the group’s outlook? 

Well, falling car sales is a concern, however, right now the stock is priced for the worst case scenario. Around half of the firm’s outlets sell luxury vehicles, which tend to be less sensitive to cyclical trends. Then there’s also the aftersales division to consider. Even though aftersales is only 11% of the total revenue mix, it accounts for 38% of group gross profit. 

All in all, even though the business environment might get tougher for Cambria, the company won’t vanish overnight, and while the firm is facing headwinds right now, over the next decade, growth should return, and in the meantime, shareholder equity should continue to grow.

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.

Rupert Hargreaves owns shares of Cambria Automobiles. The Motley Fool UK owns shares of Cambria Automobiles. 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

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »