The automotive and mining sectors are currently experiencing very different fortunes. While an improving global economy, loose monetary policy across much of the developed world and increasing consumer confidence are causing sales of cars to soar, weak commodity prices and a global supply/demand imbalance in metals means that the outlook for mining stocks is relatively poor. As such, it seems obvious to many investors to buy automotive stocks such as Pendragon (LSE: PDG) and Lookers (LSE: LOOK).
In fact, today’s results from Pendragon, which owns the Stratstone and Evans Halshaw brands, show that the company is moving from strength to strength. In the first half of this year, Pendragon delivered an increase in pretax profit of 83% versus the first half of 2014, with it increasing from £33m to £60m. And, on the back of improved demand for aftersales services as well as new and used vehicles, Pendragon now expects to comfortably beat previous guidance for the full year. As such, its shares have risen by over 5% today.
Of course, investors may doubt whether Pendragon can keep its share price momentum going, with its valuation having risen by 25% since the turn of the year. However, it continues to offer excellent value for money, with its shares trading on a price to earnings (P/E) ratio of just 12.4. And, with its bottom line set to rise in the high single-digits in the current year, it appears to justify a further upward rerating which would be great news for investors in the company.
Alongside Pendragon in the automotive sector is Lookers. Its shares also appear to offer excellent value for money, with them trading on a P/E ratio of just 12.2 and, despite having risen by 26% year-to-date, there is considerable upside potential on the cards. Looking ahead, Lookers and Pendragon should benefit from continued low interest rates and improving consumer confidence. And, while monetary policy will tighten over the medium term, it is unlikely to be at a brisk pace, thereby providing the two companies with strong sales potential over the medium term.
Clearly, the outlook for Lookers and Pendragon is rather different than for mining stocks such as Rio Tinto (LSE: RIO) and Glencore (LSE: GLEN). They are in the midst of a hugely challenging period, with declining commodity prices set to cause their earnings to fall by 52% and 12% respectively in the current year. As such, investor sentiment in the two stocks has fallen rapidly, with their share prices having slumped by 17% and 32% since the turn of the year.
However, both Rio Tinto and Glencore offer superb value for money and, looking ahead, are expected to turn their disappointing performance around. For example, Rio Tinto’s renewed focus on generating efficiencies and on increasing supply is set to cause an 11% rise in its bottom line next year, while Glencore’s net profit is set to surge by as much as 50% in 2016. And, with the two companies trading on price to earnings growth (PEG) ratios of 1.3 (Rio Tinto) and 0.2 (Glencore), their shares appear to be hugely appealing for investors who can live with above average volatility.
In fact, while Lookers and Pendragon are very much worth buying at the present time, the mining sector looks massively undervalued and, as such, the likes of Rio Tinto and Glencore appear to be better options for long term investors.
