Franchised motor retailer Cambria Automobiles (LSE: CAMB) has today released an upbeat trading update with plenty of clues as to its future performance that can help investors decide whether it’s worth buying instead of consumer goods sector peer Diageo (LSE: DGE).
Cambria recorded growth in the second half of the year, which mirrored its strong performance in the first half. And it said trading in the first 11 months of the year was substantially ahead of the same period from the prior year on both a total and like-for-like (LFL) basis.
For example, new vehicle unit sales were up by 11% (3.8% on a LFL basis), with gross profit per retail unit increasing year-on-year. Similarly, used vehicle sales rose by 4.4% (2.6% on a LFL basis) and gross profit per unit continues to increase. Meanwhile, Cambria’s after-sales operations saw profitability increase by 3.7% versus the corresponding period (flat on a LFL basis).
Cambria’s recent acquisitions are performing well and have been successfully integrated into the wider business. Its new car order book is building well and in line with its expectations ahead of the important September trading period. And with Tim Duckers having joined the board as managing director of the motor division, Cambria is well placed to deliver impressive earnings growth.
On this topic, Cambria is forecast to increase its earnings by 16% in the current year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.4, which indicates that it offers excellent value for money. Compared to a large-cap consumer sector peer such as Diageo, this low valuation has huge appeal. Diageo has a PEG ratio of 1.4 which, while appealing in its own right, indicates that there’s less upward rerating potential than is the case for Cambria.
Of course, the main reason for this is the differing risk profiles of the two stocks. In Diageo’s case, the company offers a hugely diversified investment opportunity, with the drinks giant having a wide geographical spread and a range of products that are able to provide consistency and stability. Furthermore, Diageo has superb cash flow and excellent long-term growth potential thanks to its exposure to fast growing beverages markets such as China and India.
On the other hand, Cambria is much more reliant on the UK economy for its growth. Brexit brings a degree of uncertainty and with car sales being highly cyclical, they could be negatively impacted by the potential difficulties Brexit may bring. However, with a loose monetary policy likely to stay and Cambria trading on such a low valuation, I think it’s worth buying for the long term.
That said, based on the risk/reward ratio, Diageo seems to be the better buy right now. It offers much more stability and consistency than Cambria, while also having the potential to deliver index-beating performance over a long period.
Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Cambria Automobiles. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.