The Motley Fool

Brexit has been the making of this growth stock

Automotive retailer and distributor Inchcape (LSE: INCH) has released a positive trading update for the quarter to 30 September. It shows that a weaker pound has benefitted the company’s performance and this trend could continue. But does this make it the right time to buy a slice of Inchcape?

Inchcape’s revenue for the quarter increased by 15.3% at actual currency. Of that figure, 10.5% was thanks to a weaker pound, since Inchcape’s top line moved higher by 4.8% at constant currency. The weakness of the pound has been caused by Brexit, with investors becoming increasingly nervous about the prospects for the UK economy. This trend could continue as article 50 of the Lisbon Treaty is set to be invoked next year. As such, Inchcape’s financial performance looks likely to benefit from Brexit due to 75% of its sales being generated in non-sterling currencies.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

However, Inchcape’s financial performance was still strong even when the impact of the weaker pound is excluded. Its like-for-like (LFL) sales rose by 4.3% and retail revenue delivered a particularly upbeat performance. It grew by 7% and shows that Inchcape’s current strategy is performing well, with Inchcape recording growth across all five of its revenue streams in the quarter.

UK strength

Notably, Inchcape’s performance in the UK was very encouraging despite fears surrounding Brexit. LFL revenue increased by 7.3% in the UK, which alongside South Asia and Europe was the company’s best performing market in the quarter. And with Inchcape on-track to meet its full-year outlook, it seems to be moving in the right direction.

In terms of forecasts for the full year, Inchcape is expected to record a rise in earnings of 6% in the current year, followed by a further rise of 7% next year. Although these growth rates are in line with the wider market, Inchcape trades on a relatively low price-to-earnings (P/E) ratio of 11.5. As such, it has a price-to-earnings growth (PEG) ratio of 1.8 and this indicates that it offers good value for money. That’s especially the case since it offers exposure to a wide range of markets where the long-term outlook for automotive retailers is positive.

In fact, Inchcape’s growth outlook is superior to that of sector peer Lookers (LSE: LOOK). It’s expected to grow its bottom line by just 5% this year and by a further 4% next year. However, Lookers offers even better value for money than Inchcape. It has a P/E ratio of just 6.1, which when combined with its growth rate equates to a PEG ratio of 1.4. Therefore, while Inchcape is a strong buy at the present time, Lookers may offer more limited downside and the potential for greater capital gains thanks to its wider margin of safety.

Clearly, both companies operate in a cyclical industry and with the outlook for the global economy being uncertain in the short run, their share prices may be volatile. However, for the long term, they both offer excellent value for money.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to read our presentation.

Peter Stephens has no position in any shares mentioned. 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.