While the outlook for the UK economy continues to be uncertain, falling inflation could have a positive impact on consumer spending. The rate of inflation has now moved lower than wage growth for the first time in over a year and this could ease the pressure on household budgets.
With that in mind, here are two shares that could benefit from an upturn in consumer spending. They may have relatively uncertain outlooks, but their valuations suggest that they offer wide margins of safety.
Reporting on Wednesday was automotive retailer Pendragon (LSE: PDG). The company’s first quarter of the year saw it trade in line with expectations, experiencing challenging trading conditions. New vehicle revenue declined by 13.3%, which is broadly on a par with the wider market. Used vehicle revenue fell by 1.5% due to a reduction in nearly-new vehicle sales. Excluding nearly-new vehicles, used vehicle revenue increased 3.1%, versus a record comparative.
The company continues to implement its strategy of seeking to grow used vehicle sales, improving its technology offering and exiting non-core businesses. These changes could create a more focused business which is better able to offer robust revenue and profit growth.
Looking ahead, Pendragon is forecast to post a rise in its bottom line of 7% in the current year, followed by further growth of 9% next year. Despite its relatively strong growth outlook, it trades on a price-to-earnings growth (PEG) ratio of just 0.9. This suggests it could offer growth at a reasonable price and may deliver improving share price performance.
Furthermore, rising profitability could boost its dividend payments. Since the company has a yield of 5.5% from a payout that is covered 2.3 times by profit, its income prospects appear to be bright.
Also offering impressive income investing potential within the FTSE 250 is pub company Greene King (LSE: GNK). Its performance has been rather mixed in the last five years, growing its bottom line at an annualised rate of 5.7%. However, its performance has been inconsistent and in the current year it’s expected to report a rise in earnings of just 1%.
Clearly, the travel and leisure sector is being hurt to at least some degree by weak consumer confidence. In recent months it has fallen to its lowest level in nearly four years and this trend could continue as Brexit talks move ahead.
However, with Greene King now trading on a price-to-earnings growth (PEG) ratio of under 10, it seems to offer a wide margin of safety. Alongside this, the company could benefit from rising consumer disposable incomes in real terms over the medium term.
This could help it to pay a higher dividend, with its 6% yield appearing to be sustainable due to dividend cover being 1.9 times. As such, now could be the right time to buy the stock, with it seeming to offer value and income investing potential.
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Peter Stephens has no position in any of the 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.