For many investors, the uncertain outlook for the UK economy makes it an unattractive place to invest. Brexit, political uncertainty, higher inflation and weak consumer spending mean that a number of UK stocks face the prospect of negative sentiment at the present time and in future.
While it may mean disappointing performance in the short run, it could also present an opportunity for long-term investors to buy stocks when they are trading on low valuations. In many cases their outlooks are relatively positive, and earnings growth may be ahead. Here are two companies which could fall into that category.
Reporting on Tuesday was automotive retail and leasing company Marshall Motor Holdings (LSE: MMH). The company announced strong performance, with profit materially higher than in the prior year. This has been driven by continued like-for-like (LFL) sales growth, as well as the contribution of Ridgeway Garages, which was acquired in May 2016.
In the company’s Retail segment, many customers pulled forward new car purchases in order to avoid changes to Vehicle Excise Duty that came into force in April. This helped to boost the segment’s performance, although the UK new car market declined. This was expected, although new registrations to fleet customers helped to offset a fall in registrations to retail customers. Meanwhile, in the company’s Leasing segment, profitability remained robust and this provides further growth opportunities for the business.
Looking ahead, Marshalls Motor Group is expected to record a fall in earnings of 1% this year, followed by growth of 2% next year. Clearly, this is a rather lacklustre outlook. However, with the company’s shares trading on a price-to-earnings (P/E) ratio of just 5.5, it offers an exceptionally wide margin of safety. This suggests that even with the risks it faces from a declining UK car market, now could be the right time to buy the company for the long term.
Also offering a wide margin of safety at the present time is fellow automotive retailer Pendragon (LSE: PDG). The company faces a difficult outlook due in part to the challenging environment within the UK economy. This is set to cause the company’s bottom line to flat line in the current year after four consecutive years of growth. As such, in the near term at least, there seems to be a lack of a catalyst to push its share price higher.
Of course, the automotive retail market is highly cyclical. Therefore, the downtrend being experienced right now is unlikely to last indefinitely. In fact it could present an opportunity to buy while companies such as Pendragon trade on low valuations. This could lead to an upward re-rating in future as sales and profitability start to pick up once again.
Looking ahead to next year, Pendragon is forecast to report a rise in earnings of 7%. This puts it on a price-to-earnings growth (PEG) ratio of just one. This suggests that it offers a sufficiently wide margin of safety to merit investment.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Pendragon. 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.