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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