Could AA Group (LSE: AA) be considered a terrific herd-defying share to buy ahead of fresh financials set for mid-August? Shares in the auto breakdown service have kept on crashing (no pun intended) over the summer, and as I type, the firm is worth less than half of of what it was just 12 months ago.
Optimistic investors would point to its rock bottom forward P/E ratio of 3.4 times as possible reason to take a punt, though, before the release of pre-close trading details scheduled for August 13. AA’s chubby corresponding dividend yield of 4.1% may well attract the attention of dividend-hungry investors too.
The small-cap soothed investor nerves last month with advice that it remained “well positioned to deliver trading EBITDA growth and strong free cash flow generation” in the year to January 2021. A couple of months earlier in April it had taken the hatchet to dividends thanks to a 62% fall in pre-tax profits in fiscal 2020. Another reassuring statement in the days ahead could lead to speculation that it’s finally steadied the ship and could lead to fresh bouts of buying activity.
Pros and cons
That said, there’s a reason why the market has been selling AA despite those rosier financials of recent weeks.
On the plus side the company, which has drawn up new significant partnerships for its roadside services with the likes of Lloyds Banking Group, Jaguar Land Rover and Volkswagen in recent times, continues to add to its list of blue-chip clients and put Admiral in its portfolio several weeks ago as well. The company is hoping that investment in new technology (like its new so-called Smart Breakdown service that detects faults before they happen) will help it to win business with corporate customers and private individuals alike.
But the intense competition in the marketplace continues to haunt AA and its hopes of profits recovery. Membership at the company slipped 2% last year to 3.21m accounts, and there’s more than a whiff of expectation that the huge investment it has made in technology of late is stopping customer numbers falling off a cliff and nothing more.
I’m not a fan. But you might be
Whether you are talking about phone contracts, bank accounts or pet insurance, citizens are becoming more and more nomadic and increasingly happy to shop around to find the best deal. The breakdown cover market is no different either.
Indeed, a recent report on the industry showed that a whopping four-fifths of those renewing their policy either look for an alternative policy or chat with their existing provider to bring down the cost. It’s mighty probable that the numbers are likely to keep creeping up as household budgets across the UK come under ever-increasing pressure, a worrying prospect for providers of premium cover like AA.
I can see why contrarian investors might want to grab a slice of the action right now given the huge investment AA is making to revitalise its businesses. And it is quite possible that its share price could rise on those upcoming financials as well. For my money, though, doubts over the breakdown specialist’s profits outlook in the near-term and beyond remain too high to justify buying it for right now. That’s why I plan to continue avoiding it.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.