The car dealership chain Lookers (LSE: LOOK) has had a tumultuous couple of years. That helps explain why this UK penny share now trades at less than a pound. But I would still buy it today for my portfolio. Here’s why.
What I look for in a penny share
When assessing UK penny shares, I look for the same things I do with shares trading at higher prices. What is the company likely to be worth in the future? How well does the share price reflect that?
In the case of Lookers, a lot of the reasons for the company’s troubles are already in the rear view mirror. Accounting irregularities were uncovered – but there has been an external investigation and change of guard at the company. So I see no particular reason to be concerned about a recurrence.
That means I can focus squarely on the company’s business prospects.
One big question facing companies like Lookers and rival Pendragon is what the future looks like for car dealerships. Will the rise of digital competitors like Cazoo eat into the lucrative market?
I am optimistic about this. I expect that eventually a large proportion of car sales will be online. However, I think there will always be a place for physical dealerships, especially for higher priced cars where service and sales skills help close deals. Additionally, an established dealership brand could provide reassurance online. So the Internet isn’t simply a threat to Lookers – it could be an opportunity.
A UK penny share with strong business performance
Here and now, Lookers is performing well. In its final results this month, the company revealed that despite all last year’s challenges, it was still able to turn a profit at the operating level and reduce net debt. A loss per share of 1.1p wasn’t good, but it was a lot better than the prior year’s equivalent figure of 10.7p.
The company characterised trading in the first six months of 2021 as “exceptionally strong”. I think that is very encouraging. It suggests that not only has demand come back strongly, but also that customers haven’t been put off Lookers by its prior accounting scandal. That is encouraging for the long-term prospects of the company.
It added that it remained confident for the remainder of the year, albeit a risk remains that any further pandemic restrictions such as lockdowns could hurt sales.
Why I’d buy Lookers
With strong performance and a promising outlook, I would consider buying more Lookers for my portfolio today. The UK penny share benefits from the company’s strong brand, resilient customer demand and a property portfolio valued at 77p per share at the end of last year – higher than the current share price.
Risks remain, though. Lookers has been through a challenging period and sometimes the organisational scars from such an episode can take a while to heal. The coming several years are important in re-establishing customer confidence, and that needs to hold up for revenues to be sustained.
Despite the risks, I continue to hold this UK penny share and would consider buying more for my portfolio today.
Christopher Ruane owns shares in Lookers. The Motley Fool UK has recommended 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.