Car Dealerships (VTU, CAMB, LOOK, PDG)

Wednesday, May 22 2013 by
Car Dealerships VTU CAMB LOOK PDG

Part 1: Introduction and basic value

I like doing sectoral comparisons between companies. I think most of us intuitively understand that, at the most basic level, similar companies should command similar prices in the market - though defining 'similar prices' (what metric? how similar?) is slightly more slippery than I've made it sound. The necessary clarification is that the companies involved really do have to be alike. It might sound obvious, but sectoral comparisons are only really relevant when the companies involved have very analogous business models - comparing the supermarkets, or the large national housebuilders, for instance. This is something which I suspect is often forgotten when trying to justify a small-cap 'rerating', for instance - the old chestnut of putting X next to the more lavishly valued Y, and forgetting the myriad things which make the businesses two entirely different entities.

Car dealerships are a good example of where I think comparisons are relevant. These companies tend to have those similar business models - though with obvious internal differences and some different segments. Given that, I plunge on into the abyss of car company accounts seeking some sort of logic that'll deliver me a winner - a best value car dealership, only for the equity and not a second-hand Ford Focus. Before that, though, some industry thoughts.

On car dealerships

There's a reason car dealerships interest me, and it's not because I like cars. My interest is more financial - it's a sector that seems to be moving quickly in one direction, and whenever there's a rush of capital I'm curious to see where it's headed and why. In the case of car dealerships, it's the trend towards acquisition and empire-building; take a glance at the annual reports or strategies of these companies and you're guaranteed to see talk about 'fragmented' markets. Most of these companies have grown or are actively growing throw acquisition. From Vertu's AIM admission document back in 2006:

The UK motor retail sector is fragmented; in 2005 there were over 5,400 motor dealerships in the UK, of which the ten largest motor retail groups represented less than 19 per cent.

Granted that was a little while ago now, but the history of how all these competitive forces whirled out is interesting, too, as it's all to do with legislation attempting to muscle a rather anti-competitive industry apart - look up…

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Vertu Motors plc is an automotive retailer in the United Kingdom. The principal activity of the Company is the sale of new cars, motorcycles, and commercial vehicles and used vehicles, together with related aftersales services. The Company is engaged in the provision of management services to all subsidiary statutory entities. The Company operates a chain of franchised motor dealerships offering sale, servicing, parts and bodyshop facilities for new and used car and commercial vehicles. The Company also operates various franchise dealerships, such as Volvo, Volkswagen, Land Rover, Audi, Mercedes-Benz and Jaguar, and operates Honda dealerships in the United Kingdom. The Company operates approximately 125 franchised and over three non-franchised operations across England and Scotland. The Company's subsidiaries include Bristol Street First Investments Limited, Bristol Street Fourth Investments Limited, Vertu Motors (VMC) Limited and Grantham Motor Company Limited. more »

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Cambria Automobiles plc is a motor dealer, which is engaged in the sale and servicing of motor vehicles. The Company is engaged in the provision of car vehicle sales, vehicle servicing and related services. It is a retailer of new and used cars, commercial vehicles and motorbikes. It operates on a dealership-by-dealership basis. It operates from approximately 30 sites with a total of over 50 dealer franchises. It operates dealerships across England, from the North West through the Midlands, down to Kent in the Southeast and across Exeter in the South West, trading under local brand names, such as Dees, Doves, Grange, Invicta, Motorparks and Pure Triumph. Its brand portfolio comprises Abarth, Alfa Romeo, Aston Martin, Dacia, Ford, Fiat, Honda, Jaguar, Jeep, Land Rover, Mazda, Nissan, Renault, Seat, Triumph, Vauxhall and Volvo. It also provides ancillary services. It offers finance and insurance for the execution of the transaction along with service plans to maintain the vehicle. more »

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Lookers plc operates as a motor retail and aftersales company in the United Kingdom. The Company operates through two business segments: motor distribution and parts distribution. The motor division consists of over 150 franchised dealerships representing over 30 marques from approximately 100 locations. Aftersales represents the servicing, repair and sale of franchised parts to customers' vehicles. Its parts division operates in the independent aftermarket sector of the United Kingdom's motor retail market, where it operates through three operating companies: FPS, Apec Braking and BTN Turbo. FPS is a warehouse distributor of automotive parts. Apec Braking is a provider of dry braking (pads and discs). BTN Turbo is a distributor of turbochargers and supplier of related value added services. Its operations are also carried out across Ireland. It sells approximately 180,000 new and used cars and vans per year. In addition, it has an independent parts distribution business. more »

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  Is LON:VTU fundamentally strong or weak? Find out More »

5 Comments on this Article show/hide all

alterego 22nd May '13 1 of 5

looking fwd to your next post on this - very interesting

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intuitive6191 22nd May '13 2 of 5

I hold a modest amount of Lookers so this is of interest. My understanding of the industry is that profit on new car sales is quite slim and the key is to keep the customer for aftersales.

I think that the Block Exemption was introduced so that customers had the freedom to go to other garages for aftersales (other than the garage that sold them the car) and not invalidate their warranty.In actual fact customers seem to be quite sticky and if the selling garage does a good job of aftersales then the customer seems to stay with them.

I doubt that many customers understand the freedom that Block Exemption gives them, or if they do, are not willing to take a chance with another garage.

Small independent service and repair garages seem to be a lot cheaper for aftersales but have difficulty in attracting aftersales business from the big retailers. In this respect it’s probably a case of reputation and brand.

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alterego 22nd May '13 3 of 5

One of the reasons why people stick with main dealer servicing is that when you come to trade in your car, the absence of a main dealer stamp will be used to justify a lower trade in value in my experience. I hold VTU who are clear that customer retention and after sales are key to increasing profitability. They seem to be having some success on this front too.

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corrsfan 22nd May '13 4 of 5

While were on the topic of dealers and retention. Is it not also to do with the manufacturers making certain tools and other diagnostics harder for the independent garage to obtain and more costly to use too so it can appear a false economy. Eg the ford tool costs 700 for the laptop and probe then theres the 3000 in licencing that a garage has to pay per year to use it. And none of this includes training that the official deakers would get for grattis. This resource would be unique to ford, and they arent the only makes..

Also 2 of the last brand new cars my parents have bought had a 3 year options for servicing and parts at nominal discounted costs to cover the services as required to keep the warranty good. Each time they go for this. Its usually like 3-400 for three years or something like that.

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ExpectingValue 22nd May '13 5 of 5

Thanks for the comments all.

Re: 2/4: " My understanding of the industry is that profit on new car sales is quite slim and the key is to keep the customer for aftersales."

Don't want to jump the gun on my next post but I suspect and have a little evidence so far to support this being the case. A more in depth question is how Lookers are able to do it so well. Is their advantage in this field replicable? One would think car dealerships as businesses are quite difficult to differentiate and 'protect'. If I have a particularly nifty way of making sure customers give me all that margin on aftersales, anyone else can just copy it.

Can't disagree with all the stuff on the BE. Consumers always tend to be more sticky than policy makers (or economic theory) would like, and companies always tend to be more protective of their monopolies than anyone else would like..!

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About ExpectingValue


Private investor turned hedge fund analyst, looking predominantly at global small caps. Sector agnostic.


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