It’s no secret that Brexit uncertainty has dealt a hammerblow to the retail sector of late. And the pressure has been particularly painful for car retailers. Sales of big-ticket products are, after all, always hit the hardest in times of geopolitical and macroeconomic uncertainty like these.
New car sales continue to struggle, as freshest figures from the Society of Motor Manufacturers and Traders (SMMT) show. But news flow on Wednesday concerning sales of pre-owned units has been more encouraging.
Could now be the time to buy into used car dealership Motorpoint Group (LSE: MOTR)?
So what does that newest SMMT release show, you ask? Despite declining consumer confidence, sales of second-hand units have held up pretty well. Certainly, when compared with demand for new cars, which dropped to their lowest since 2013 last year.
In 2019, sales of pre-owned cars remained basically flat at 7.94m units. But what’s encouraging is that this stable performance was due to the secondhand market moving back into growth during the latter half of last year.
It makes sense that the used market has performed better than the new car sector. Vehicles with miles already on the clock are sometimes much, much cheaper than their equivalents that have just rolled out of the showroom.
But better cost-effectiveness in these uncertain times isn’t the only reason why pre-owned sales are outperforming those of new vehicles. Mixed messages from successive government over future emissions standards are also hampering consumer appetite for new models.
Stuck in gear
So is the uptick in car sales in recent months reason to buy into Motorpoint, then? I don’t believe so.
Trading conditions may have been better for the used end of the market in the latter part of 2019. But this doesn’t mean that life has been a bed of roses for retailers specialising in the pre-owned segment.
In November, Motorpoint announced that profits tanked more than 18% in the six months to September, caused by stagnating revenues and rising costs. It’s important to remember that while the used car market has been stronger more recently, sales of such vehicles haven’t exactly soared (up 2.4% in the fourth quarter, according to the SMMT).
It’s possible that consumers will keep their pursestrings firmly tightened throughout 2020 and even beyond too. As Motorpoint chief executive Mark Carpenter said: “Potential outcomes from the government’s Brexit negotiations could influence our future performance in unpredictable ways.” I for one am worried about the prospect of UK and European Union lawmakers failing to strike a trade deal at the end of 2020 following bumpy talks. This is a scenario that could create big troubles for the car industry for years to come.
Recent share price gains leaves Motorpoint trading on a forward P/E ratio of 15.5 times. It’s a figure that’s fails to reflect its high risk profile, in my opinion, and the possibility is that broker expectations of a 4% earnings rise in the fiscal year to March and double-digit-percentage rises in financial 2021 and 2022 could fall flat. This is one share I’m happy to continue avoiding for the time being.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Motorpoint. 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.