Over the past year, the Vertu Motors (LSE: VTU) share price has been able to double due to the second-hand car dealership’s strong recovery. But at 51p, I believe that this penny stock is still undervalued, especially after its recent trading update. Here are the reasons why I might buy in September.
Last week, it was revealed that the company expects to make full-year pre-tax profit of £50m-£55m, up from previous expectations of £40m-£45m. This is due to increased demand, especially as the global semiconductor shortage has been hindering the production of new cars. As such, many customers have turned to second-hand cars, and Vertu has seen the benefits of this. The reluctance of some to use public transport due to the pandemic has also been beneficial for the company.
The strong performance has allowed the car dealership to launch a £3m share buyback programme. This decision has been prompted by the fact that the board believe “the share price of the company … [is] at a discount to the tangible net asset value”. This is a major indication that this penny stock is underpriced. The Vertu share price also rose 8% as a result. Dividend payments are set to resume as well, and if they equal 2019 levels, shareholders can expect a yield of over 3%. Accordingly, shareholder returns look extremely strong, and this is one factor tempting me.
Despite the fact I feel that Vertu is underpriced, there are still risks that require consideration. Indeed, while the current semiconductor shortage may be a short-term benefit to profits, it also means that used vehicle supply may be restricted in the coming months. This would likely damage profits in the future, and the current strong performance may be a one-off.
There is also a large amount of competition in the market. One example is Cazoo, which is going public through a SPAC (special purpose acquisition company) this Friday. Cazoo operates solely online, and vehicles are delivered straight to the customers’ door. This bypasses the need for expensive showrooms, which strain profit margins. As such, there may be a view that Vertu is old-fashioned, and is not adapting quickly enough. This means it could get left behind.
Why would I still buy this penny stock?
Despite these fears, I still believe Vertu is deeply undervalued. In fact, in its launch, Cazoo is going to be valued at £6bn, while Vertu is only valued at a meagre £188m. This is despite the current unprofitability of Cazoo.
To further demonstrate the company’s undervaluation, I must also point out that it has a price-to-earnings ratio of far below 10, and a price-to-book ratio of just 0.7. Both of these multiples are well below the market average, implying that the stock has plenty of room to rise. It’s therefore no surprise that the board is looking to buy back shares. This is why I am willing to overlook the negatives in this company and may buy some shares in September.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Vertu Motors. 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.