The share price of Vertu Motors (LSE: VTU) continued its slide today on the release of interim results. The automotive retailer has a network of 125 sales and aftersales outlets across the UK and the shares are down around 22% since the end of August.
Today’s figures show that revenue increased by around 7.6% compared to the equivalent period last year, but adjusted earnings per share fell by 8%. There’s nothing the stock market hates more than falling earnings, so I think we’ve found the reason for the weakness in the share price. The directors held the interim dividend firm at last year’s level.
In July, towards the end of the period, the company spent almost £22m acquiring Hughes Group Holdings Limited, which came with a “significant Mercedes-Benz presence in the M4/M40 corridor.” I think that’s a bold move with so many economic uncertainties on the horizon. The balance sheet was weakened and the firm reported net debt on 31 August of £8.7m, which compares to a net cash position of £20.8m the year before.
Car dealership businesses are notoriously cyclical and when trading conditions have been good and profitable, I reckon it makes sense for them to build up their cash reserves so that they can survive the next downturn in the economy. Indeed, the current trading and outlook statement is a little murky and highlights several risks.
The company said that supply-side issues in the new car market led to declining volumes “with September registrations being the lowest since 2011.” September trading was affected by Worldwide Harmonised Light Vehicle Test Procedure (WLTP) emissions regulations across the European Union. Meanwhile, car margins are under pressure because the depressed level of Sterling is affecting manufacturers’ profitability. The firm reckons some supply issues are “likely to continue into early 2019.”
Give me steady demand
Demand for cars is holding up for the time being but the directors admit that political uncertainty in the UK could lead to consumer uncertainty and volatility for the rest of the firm’s trading year. The company goes on to list a number of positives, but the stock market looks wary of the stock to me. And I share the market’s concerns. Despite the firm’s high-looking dividend yield and substantial asset backing from the property it owns, I think the shares are vulnerable to downside shocks, so I’d rather invest in a less cyclical firm such as pharmaceutical outfit GlaxoSmithKline (LSE: GSK).
One of the main attractions of the firm to me is that its pharmaceutical business resides at the opposite end of the defensive/cyclical scale from Vertu Motors. Unlike big-ticket purchases such as cars, people keep buying their medicines whatever the economic climate and such reliable repeat-purchasing tends to lead to consistent cash inflows.
On top of that, GlaxoSmithKline is paying a bigger dividend than Vertu Motors anyway. The recent share price close to 1,487p throws up a tempting forward yield of 5.4% for 2019. I think that GlaxoSmithKline is recovering well from a period of declining earnings as previously best-selling drugs lost their patent protection. I’d rather take my chances with the firm’s forward prospects than with the uncertain outlook of a cyclical firm such as Vertu Motors.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Vertu Motors. 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.