It should have come as no surprise that Pendragon’s (LSE: PDG) share price took an almighty battering last week. The car retailer has been firmly on the defensive for many months now, diving 33% during the past year alone and falling through the floor last week in the wake of some truly shocking financials released.
Yet it appeared inevitable that Pendragon would be forced to bite the bullet and warn on profits as it did given the steady stream of industry announcements showing how new car sales are plummeting and how used car sales growth has ground to a halt.
Last week, the small-cap said that it expected to now record a “small” pre-tax loss this year, reflecting expectations that “the first-half of 2019 [will] be significantly loss making ahead of returning to overall group profitability for the second-half.”
Flying into danger
If I were a Pendragon shareholder though, the last half of that sentence would have chilled me to the bone. What chance of the retailer returning to profit in the latter half of 2019 given that the decline in new sales is worsening, if anything?
Latest data from the Society of Motor Manufacturers and Traders showed new unit sales dropped 4.6% year-on-year in May, worsening from the 4.1% annual decline recorded in April.
This correlates with some truly shocking gauges charting the health of the broader retail sector too, the freshest report from the British Retail Consortium showing total retail sales in the UK dropping at their sharpest monthly pace in May since the body began compiling records in 1995.
Obviously, big ticket items like cars are the first items to be struck from shopping lists in times of great economic upheaval and uncertainty like these. And with botched Brexit negotiations set to stretch on until the autumn at least, inflation on the rise, and signs growing of a fierce slowdown in the global economy, conditions aren’t likely to be conducive for Pendragon to return to profits in the second half, not in my opinion.
Indeed, I’m fully expecting the firm to downgrade its full-year estimates once again in the not-too-distant future.
Out of puff?
For this reason, I’m not tempted to pick up Pendragon despite it currently trading at six-and-a-half-year lows below 18p per share. A forward P/E ratio of 4.4 times suggests that its cheap, but it’s cheap for a reason. So ignore the retailer’s low valuation and its 10.8% dividend yield, I say.
One final point. It’s fun to note that the share prices of the likes of Vertu Motors, Motorpoint Group and Marshall Motor Group have remained remarkably strong despite the woeful update from their retail rival Pendragon. Investors should also be worried about some scary trading statements here too.
So, for this reason, I’m also prepared to ignore their sub-10 earnings multiples and 4%+ corresponding dividend yields, and buy other stocks instead.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Pendragon and 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.