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Why I’m avoiding this Neil Woodford-backed growth stock

Investors in car retailer BCA Marketplace (LSE: BCA) have endured a roller coaster ride since the company first listed in 2015. That’s not to say the owner of the brand is running short of admirers. Star fund manager Neil Woodford is a fan with the company occupying a place in both his Equity Income and Income Focus funds. 

With full-year results out this morning, does the £1.5bn cap deserve to be in more investors’ portfolios? Let’s check the numbers.

Strong results

In the 12 months to the start of April, revenue at BCA rose 76% to £2.3bn, adjusted EBITDA came in 38% higher at £135.6m and operating profit rose by 350% to £74.3m. 

Over the period, the company achieved re-marketing volumes of 956,000 and 347,000 units in its UK and International divisions respectively. WeBuyAnyCar sold 194,000 units (up 12.8%) and purchased its one millionth vehicle. As part of its desire to become “a seamless and efficient one-stop shop for the passage of vehicles throughout their lifecycle,” BCA also acquired refurbishment services companies Paragon Automotive Ltd and Supreme Wheels Direct during the reporting period.

Shares in BCA were up just over 4% in early trading. So, given today’s encouraging figures, why am I not a buyer?

It’s mostly to do with the amount of debt on the company’s books. At the beginning of April, this stood at £261.5m — a 53% rise on the previous year. While this can be justified by BCA’s high growth strategy, it’s not something I’m completely comfortable with given the cyclical nature of the industry in which the business operates.

A deeper look at BCA’s fundamentals makes me want to avoid the shares even more. Operating margins and returns on investment have become as erratic as the share price. Elsewhere, dividend cover on the 3.4% yield — at 1.35 times profits — is adequate but hardly the sort of security most income investors will be looking for. Today’s announcement of a 12.5% hike to the full-year payout may please some, but is BCA trying to be all things to all people?

At 22 times 2017 earnings, I think the shares are too expensive to warrant consideration at the current time.

A safer bet?

A better pick in the industry, in my opinion, would be Lookers (LSE: LOOK).

In its most recent update, the £480m cap motor retailer reflected on what had been a strong period of trading for the company. In the quarter to the end of March, it delivered a 17% increase in gross profit on new car sales and 9% on a like-for-like basis. For used cars, the figures were even better — up 23% and 17% respectively. There was also an 18% increase in gross profits on after-sales (9% like-for-like).  

Looking forward, the company has made what it describes as a “pleasing start of the year” and believes results for 2017 should be in line with management expectations.

With significantly less debt on is balance sheet and “substantial headroom” in its banking facilities to fund further acquisitions, the Manchester-based business looks a decidedly less risky option — in my opinion — than BCA. While operating margins are typically low for companies operating in the industry (and Lookers is no exception), returns on capital have been consistently decent. The forecast 3.5% dividend yield is also easily covered by profits.

Trading at just eight times earnings, I think there’s sufficient value in the shares to make Lookers worth a gander.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.