Lookers: Set For Further Growth?

28th Jul '15 by Tom Firth

2 comments 6395 reads

Lookers plc is an old and well established business engaged in the sale of cars and related services in the UK. Like many of its competitors, it suffered badly during the recession but has since made a good recovery and is trading strongly today. Following its growth over the past 6 years, the company turns up on a number of screens and appears to be statistically cheap in addition to having excellent momentum. The question is, as always, can this continue?

Screen Summary

A PE ratio of 11.4x is attractive and appears to undervalue the company’s earnings.
A PS ratio of 0.21x is very cheap indeed although, given the business’s low operating margins, seems somewhat justified.
A PB ratio of 2.43x is seen as expensive.
An ROC of 18.8% is excellent despite thin operating margins of around 2.4%.
A dividend yield of 2.07% is low but may improve if dividends continue to increase as they have done.

Company Background

The Lookers Group was founded by John Looker in 1908, and was initially involved in the sale of bicycles, spare parts and used cars. It was not until 1910 that the business joined with a local garage owner to form Lookers ltd, at which point the business became primarily a Ford dealership.

Over the past 100 years the business has continued to grow, surviving both world wars and countless changes in the ever competitive auto industry. This is testament to the success of consecutive management teams who appear, collectively, to have fulfilled their duties as custodians. The fact that such an inherently low margin business has even survived this long is truly remarkable.

These days, John Looker would be proud that his business has spread from its humble beginnings in Manchester to serve every part of the UK and Ireland, to see it selling almost every car imaginable from Fiats to Ferraris and earning gross revenues of over £3 billion.

Strategy

In addition to its traditional business of selling new and second hand cars, Lookers is very much involved in the aftermarket, with significant earnings coming from the sale of service agreements and franchised parts. These revenue streams tend to be less volatile and have greater long term sustainability, providing a stable base which the company can rely on throughout the business cycle. On top of organic growth, the business has also stated that it intends to make selective acquisitions, where…

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janebolacha

28th Jul '15

Tom, may I ask why you chose Lookers for your analysis,
whether you compared this company with its sector peers
and whether you have done overall sectoral research,
covering such areas as market share, trends and growth.
I can understand your approach, essentially one that is
figures- and assumption-based extrapolation, but it's an
approach that I personally feel uneasy with as it seems
to me to disregard the commercial and market aspects
of the business. It is only part of what is needed in order
to make an investing decision, imo.

Tom Firth

Hi Jane,

Thanks for your comment. Firstly, in answer to the second half of your post, I agree entirely with you that this is a heavily assumption-based quantitative analysis, and that if I were to really consider investing for the long run I would want to do a lot more work into Lookers' specific place within the market, its competitive advantages and disadvantages and the strengths of other competitors too.

Such analysis is quite time consuming (as I'm sure you know!), however, and a thought process similar to this one is something I put all ideas through at first in order to determine if I might want to invest the time to look further. As someone in full time employment and with a lot of studying on the side, I don't get that long to look at everything so its key to me that I have a way of focusing my efforts.

All this analysis says to me is that the discrepancy between the rough expected long term growth rate of the motor industry in the UK and the growth rate required by Lookers to justify its current valuation is too great for me to warrant spending the time on.

Lookers appears to be a well run company and they may well achieve the superior growth they need in an optimistic scenario. On the other hand, they may not, and I would rather pick investments that are priced such that I am likely to see a good long term return even if the ideal scenario does not transpire. Had my DCF analysis indicated that a long term growth rate of only 1% was needed to justify today's price, for example, then I might be tempted to look deeper as this would be a much easier target for the company to hit.

On the first point, I chose Lookers for a couple of reasons. I have been looking into the industry a little bit recently as a number of such companies are appearing on screens after a profitable few years. Lookers is one that seemed quite attractive to me on the screens (consistent earnings and dividend growth, consistent and improving ROCE etc) and so I thought it might be one that others would be looking at too and therefore interested in reading about.

I'm still doing a bit of reading on a few of them though and may consider writing up a comparison piece to look at the competitive positions of Lookers and some others - thanks for the idea! Hope that answers your questions and please do say if I haven't explained that well at all.

Tom

Lookers: Set for Further Growth?

Screen Summary

Company Background

Strategy

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Tom Firth

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