In September last year I wrote an article about Car (ASX:CAR) where I asked the question, ‘could they continue to compound their growth?’ and pointed out that ‘ a lot will hinge on their ability to expand profitably in overseas markets.’ Exactly 14 months later, the share price has increased by 43%. Pro-forma revenue grew by 17%, of which 59% is now derived from outside Australia. Underlying profit also increased by 24%.
The premise of the previous article was that CAR was a high quality business that had demonstrated an ability to compound growth over many years. This was confirmed by its qualification for the Quality Compounder screen as presented by Stockopedia contributor Roland Head in his article Building a screen to find Compounding Quality stocks. CAR no longer meets the criteria for this screen as shown in the table below, although it only misses out on three areas which we will examine below.
Criteria | Threshold | CAR (Sep 23) | CAR (Nov 24) |
QualityRank | 80 | 82 | 99 |
Long-term ROCE | 18% | 21.4% | 16.1% |
TTM ROCE | 15% | 16.5% | 9.4% |
Operating margin 5 yr avg | 10% | 54.3% | 53.1% |
Operating margin TTM | 10% | 95.0%* | 37.9% |
Net margin 5 yr avg | 8% | 38.4% | 39.0% |
Net margin TTM | 8% | 82.6%* | 22.8% |
OCF / EPS | 0.8 | 1.1 | 1.8 |
Avg FCF (long term) / Assets | 8% | 8.6% | 8.1% |
Sales CAGR 5 yr | 0% | 15.7% | 21.4% |
Sales TTM / Sales Prior TTM | 5% | 53.4% | 40.6% |
Debt to assets | <50% | 26.5% | 28.7% |
Interest cover | 10x | 18.3x | 6.4 |
* includes an abnormal gain.
The operating margin TTM of 95% for FY23 as reported in Stockopedia includes a one-off gain associated with moving to majority ownership of the US and Brazil businesses. This is not a situation that is likely to be repeated, however it does reflect very prudent investment decisions in the past. If that gain and other one- off costs were to be removed, the operating margin would have been 48%. Likewise the net margin TTM for FY23 of 82.6% drops to 35.6%.
Turning to the three areas where the criteria have been missed. Return on Capital Employed (ROCE) recorded its worst level in recent years and continued a downward trend.
Stockopedia does not use adjusted returns when calculating ROCE to avoid the situation where management may be tempted to adjust away unfavourable outcomes.…
