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Got £1,000 to invest? Here’s one FTSE 100 stock I’d buy, and another I’d avoid

These are tough times for the car industry, as the uncertainty over Brexit and the future of diesel hits sales. New car registrations are down 3.4% in the year to August, according to the Society of Motor Manufacturers and Traders, and the used car market is under pressure too.

Enter Pendragon

This is bad news for Pendragon (LSE: PDG), which sells both new and used vehicles, and offers after-sale service and repairs. Its share price crashed almost 10% today after the group unveiled a pre-tax loss of £32.2m, down from last year’s £28.4m profit, scrapped its dividend, and announced around 300 job losses. This Fool writer saw it coming.

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Management admitted to a “challenging” first half as it moves to reduce its used car stock to more appropriate levels, both through lower retail pricing and clearance through trade auction channels.” 

These necessary actions resulted in significant losses, made worse by a market-wide drop in used car values. At least the issue of stock levels has been largely addressed, management said, and it has taken measures to reduce the risk of a repeat.

Like-for-like group revenues rose by 2.9% to £2.45bn, but lower pricing ravaged profits. For example, used car revenue grew 3.7% but gross profit fell 26.1%.

Non-executive chairman Chris Chambers, who steps down on 1 October, warned that the rest of the year looks set to be challenging too. The group’s share price has now more than halved in the last year and, after five years of share price disappointment, today’s valuation of 3.9 times earnings will only tempt the bravest of bargain seekers. If we get a Brexit quick fix and avoid a global recession, Pendragon might just be worth a punt. That’s two big “ifs” though.

Auto Trader Group thrives

Not every company in the car industry is losing its grip. Classifieds advertiser Auto Trader Group (LSE: AUTO) has seen its share price accelerate 20% in the last year, as the group benefits from its market dominance and lack of a serious competitor. It remains the go-to name for those buying and selling used cars.

The lack of competition irritates many in the industry, but investors won’t be complaining, and will relish the high barriers to entry. Some say the FTSE 100 group is the motor industry’s answer to property portal Rightmove.

June’s full-year results showed both revenues and operating profits rising, the former up 8% to £355.1m, and the latter up 10% to £243.7m. The board also remains confident of meeting growth expectations, despite the challenging environment. 

Given those challenges, the £4.85bn group does look expensive at a forward P/E of 23.9 times earnings, and a PEG of 3.3. That said, its operating margins are a fat and juicy 68%, something you don’t see very often. City analysts expect earnings to grow a robust 7% this year, and 14% next. Auto Trader is clearly doing something right, Pendragon isn’t.

Conditions in the car industry are tough and look set to remain so, so I’m surprising myself by saying I reckon Auto Trader may well be a buy.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader and 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.

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