APE: At a cyclical low point?

Sometimes when investing it pays to ignore the short term headlines and go against the prevailing sentiment. Car retailing is a business that has been around for well over a century. In Australia, one of the largest, and oldest car retailers is Eagers Automotive (ASX:APE). They were founded in 1913 and listed in 1957. Today they have a market capitalization of over $3.1 billion and turnover exceeding $10 billion. They are the number one new car retailer with over 10% market share and the number one used car retailer.

So they know how to sell cars. That said, new vehicle sales in Australia are currently under a bit of pressure. The Australian Financial Review reported that at a car dealer’s conference in July, dealers were concerned that conditions were getting considerably worse. Inquiries were down 30% and orders were down 10%. Margins had fallen nearly 20% and were expected to fall further.

This fear has been borne out. According to the Federal Chamber of Automotive Industries (FCAI) new vehicle sales slumped 11.6% in November compared to November 2023. Furthermore, since July, sales have declined 8.2% when compared to the same period last year. It is even worse when looking at the private buyer segment with falls averaging 16% over the last four months. Clearly cost of living pressures and high interest rates are having an impact on discretionary purchases like new cars.

Discounting, particularly across electric vehicles, has increased as dealerships need to clear stock. Tesla’s have been coming down in price and MG recently dropped the price on their MG4 model by $10,000 or about 25%. Cheaper Chinese made EVs are putting pressure on premium electric vehicles.

This recent experience follows what had been a relatively strong period for new vehicle sales and also for used vehicles. In the first six months of 2024 the market recorded new vehicle sales growth of 8.7%. In fact, the market was at record levels.

In the midst of all this doom and gloom, Eagers Automotive have a StockRank score of 95. They are not immune to the industry wide pressures, but investing when others are cowering under the blanket can often be a profitable strategy if you have the stomach for it.

Starting with the Quality score, at 67 it is decent but not outstanding. It is dragged down by Health Trend and Bankruptcy risk but boosted by strong profitability and cashflow. ROE is high, consistently above 20%. Operating cash flow consistently comes in above EPS.

The Bankruptcy risk is high due to the high gearing level with net gearing of 227%. It is worth noting that a high portion of debt is secured by the properties it is financing as opposed to a floating charge across the whole business. They own a lot of the properties that their dealerships sit on with a property portfolio of $727 million. This compares to $589 million in leased assets on the balance sheet.

The Momentum score is high at 93, reflecting that the share price has outperformed the market by 10% over the last six months and is above the 200 day moving average. Panning out further though, the price is about 20% below where it was early in the year.

It is this longer term share price weakness that gives rise to the high Value score. It is a cyclical business and right now it is at a low point in the cycle. Value metrics include a forward PE ratio of 13, price to book value ratio of 2.4 and a price to sales ratio of 0.3. Note that price to sales is impacted by the fairly tight operating margins.

Turning to dividends, DPS has been steadily increasing. Dividends are fully franked and the yield is currently above 6%.

Turning to the most recent half year results which were released in August, it was a mixed picture. As outlined in the narrative above, record new vehicle sales lead to a record half year revenue result which was up 13.4% on the previous year. But as we move down the income statement the picture sours. EBITDA only rose 2.8% due to higher costs. But net profit after tax actually fell 18%. This was primarily due to the cost of financing higher inventory. Inventory of vehicles are purchased on finance, so higher inventory leads to higher interest expense, coupled with the fact that interest rates were a lot higher than a year ago. Also the longer cars stay on the lot the higher the inventory costs. Management stated that a one day reduction in vehicles held on inventory leads to $3 million per year in savings and a 25 bps reduction in interest rates equates to a $6 million annualised saving.

The biggest listed competitor to Eagers is Peter Warren Automotive Holdings (ASX:PWR). Eagers is more than 10 times bigger by market cap and four times bigger by revenue. It is seven times bigger by net profit and importantly, generates much better profit margins.

Clearly Eagers and its competitors are feeling the pinch right now with high cost of living pressure. However the scale of Eagers, its solid asset base and the strength of its underlying business mean it is likely to ride through this cycle as it has through many others for more than 100 years. For investors willing to look through the cycle this point in time may represent an opportunity. Clearly many have already decided to do so given the recent share price rise.

---

Important Information: Stockopedia Ltd ABN 39 757 874 670 UK business registration number 0637267 (“Stockopedia”) is an Authorised Representative of Daylight Financial Group Pty Ltd ABN 77 633 984 773 (“DFGPL”) which is the holder of an Australian Financial Services Licence (AFS Licence No. 521404).

Information in this commentary is current as at date prepared unless otherwise stated. However, please bear in mind that investments can go up or down in value, and that past performance is not a reliable indicator of future performance. For more Important Information please refer to the Disclaimer section of this website.

This communication may contain general financial product advice. It has been prepared without taking into account your personal circumstances, and you should therefore consider its appropriateness in light of your objectives, financial circumstances and needs before acting on it.

If our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement (PDS) before making any decision.

The author holds interests in the following stocks mentioned in this article: PWH. This position can and will change at any time without notice.