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Why Shares In Pendragon PLC Jumped Today

The UK’s largest automotive retailer, Pendragon (LSE: PDG) released a trading update for the three months to 30 October today, and the news has really impressed the market.car

Strong performance 

Pendragon’s shares jumped 9% in early trade, after the update from management revealed that the company’s operating profit for the period had jumped 28.8% year on year.

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What’s more, management announced today that after several years of stabilising the business, reducing debt and cutting costs, the group is now starting to expand again. For example, during the last three months Pendragon launched ‘Sell Your Car‘, a competitor to ‘webuyanycar.com‘. Sell Your Car will offer customers the highest price for their used vehicles. in an attempt to pull sales away from webuyanycar.com. 

Further, Pendragon announced today that its underlying debt to EBITDA ratio had fallen to 0.7, comfortably below the group’s targeted range of 1.0 to 1.5. As a result of this lower than targeted debt ratio, Pendragon is now looking to expand its UK footprint. Management will reveal more about the company’s expansion plans alongside full-year results.  

Undervalued 

Despite Pendragon’s performance over the past year, as well as today’s news, the company is still trading at a lowly valuation. Indeed, at present levels Pendragon is trading at a forward P/E of 11.2.

City analysts currently expect the company’s earnings per share to jump 20% this year, which means that Pendragon is trading at a PEG ratio of 0.6, indicating growth at a reasonable price. Current City figures estimate that Pendragon’s earnings will expand a further 6% during 2015. So the company is trading at a 2015 P/E of 10.5.

It’s also interesting to note that GMT Capital Corp, a value oriented investment manager with $5bn of assets under management, recently acquired a 6% of Pendragon.

Nevertheless, some investors may be put off by Pendragon’s current dividend yield, or should I say lack of it. At present the company’s shares only support a yield of 1.3%. There are certainly better dividend yields on offer elsewhere.

However, management has stated that they will consider hiking the company’s dividend payout when full-year results are released. As Pendragon’s dividend payout is currently covered nearly six times by earnings per share, there’s plenty of room for management to increase the dividend. 

Market outlook 

There’s no denying that Pendragon looks attractive at present levels. Nevertheless, the automotive market is extremely unpredictable and the market’s growth is dependent upon the health of the wider UK economy situation. Therefore, some investors may be concerned about Pendragon’s outlook.

Still, Pendragon is expecting slow and steady UK car market growth this year, with overall sales expected to expand by 2%. Year to date registrations to 30 September 2014 increased by 9.1% year on year. So, the market is expanding, along with the wider economy. 

The bottom line 

All in all, today’s update from Pendragon shows that the company’s growth is continuing at a rapid rate and at present levels the company appears to be undervalued. 

If Pendragon is not your cup of tea, there are plenty of other opportunities out there. 

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Rupert Hargreaves owns shares in Pendragon PLC . The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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