Despite publishing a record set of results for the first half today, shares in Lookers (LON: LOOK) are trading down in early deals as it seems investors are worried about the company’s prospects after Brexit.
For the six months to the end of June, Lookers revenue increased 33% to £2.3bn. Operating profit rose 20% to £59.1m and earnings per share for the period grew 17% to 9.4p. Further, during the first half the company managed to reduce its net debt by more than 50% from £161.7m at the end of 2015 to £74.9m at the end of June. These impressive operating results have given management the confidence to hike Lookers’ interim dividend by 20%.
Still, even though the company’s results for the first half look impressive, it appears the market doesn’t believe this performance can continue. And Lookers isn’t the only car dealership business that has fallen out of favour with investors since the Brexit vote.
Avoiding the sector
Shares in Pendragon (LSE: PDG) have struggled to gain traction since the end of June. Indeed, over the past three months, shares in the firm and in Lookers are down by 5.8% and 7.2% respectively. But Pendragon has also issued an upbeat trading statement for the first half during the past few weeks. The group reported a 10% increase in underlying pre-tax profit for the six months to June 30.
However, Pendragon’s interim results release also contained a warning. Management said that while new vehicle like-for-like profit rose 12% in the first half, profit growth is starting to show signs of slowing. This seems to be the key concern investors have about both Pendragon and Lookers. Granted, Pendragon’s management said the company hasn’t experienced any noticeable change in customers’ behaviour since the vote, but it’s still too early to tell if the UK’s decision to leave the EU will cause a recession in the country. In an economic slowdown, sales of big-ticket items like cars are usually the first to decline. So investors are right to be wary of investing in the sector at this uncertain time.
Nonetheless, this fear has created opportunities for the enterprising, long-term Foolish investor. Recent declines have left Pendragon and Lookers trading at extremely attractive valuations, which could be too hard to pass up.
At the time of writing shares in Pendragon are trading at a forward P/E of 8.3 and support a dividend yield of 4.4%. The payout is covered 2.8 times by earnings per share, and the company is also returning £20m to investors via way of a share buyback. Meanwhile, shares in Lookers are currently trading at a forward P/E of 7.8 and support a dividend yield of 2.8%. The payout is covered 4.6 times by earnings per share.
Based on valuation alone, Lookers appears to be a better investment than Pendragon. City analysts are also more optimistic about Lookers’ growth outlook with earnings per share growth of 7% pencilled-in for this year. Pendragon is only expected to report full-year earnings per share growth of 5%.
So overall, Lookers appears to be the better investment, but only just.
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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.