Good morning!

After looking at good results from Cambria Automobiles (LON:CAMB) yesterday, another chain of car dealerships has reported today, so let's start with that.

Vertu Motors (LON:VTU)

Share price: 58.6p
No. shares: 340.9m
Market Cap: £199.8m

Final results - for the year ended 28 Feb 2015 are out this morning. In a similar vein to Cambrian, Vertu is growing by acquiring additional dealerships, although it's about four times the size of Cambrian by turnover. The number of sites that Vertu operate rose from 106 to 116 in the year being reported.

Headline figures look good - turnover up 23.2% to £2,074.9m, adjusted profit before tax up 25.7% to £22.0m - as you would expect in this sector, a wafer thin profit margin of only 1.1% here. That is lower than the 1.4% reported yesterday by Cambrian in its interim results - it's a little surprising that the larger chain (Vertu) achieves the lower profit margin.

My main concern with this sector, as mentioned yesterday, is that car dealers are enjoying boom times at the moment, due to ultra low interest rates stimulating demand, recovering consumer confidence, and favourable exchange rate movements recently (making European imports much cheaper). So if these dealerships can only squeeze out just over 1% profit margin in the boom times, where will that leave them once demand slides back to more normal levels? Although each new car sold does carry a tail of decent margin work for the servicing & warranty work. That's what we're told anyway.

Earnings Per Share (EPS) - adjusted earnings per share rose 9.8% from 4.69p to 5.15p. Looking at the adjustments, they seem rather tenuous to me;

  • Amortisation of intangible assets of £405k (doesn't seem to be related to goodwill, as the accounting treatment of that seems to have changed to just an impairment review).
  • Share based payments charge of £645k - this is part of employee/Director remuneration, so it needs to be factored into the valuation, not ignored.
  • Exceptional charges - none this year (good), but £1,180k last year, so I suppose this is acceptable, as it will help give a reasonable comparison year on year.

Therefore I am more inclined to value the shares on the reported 4.87p EPS, and not the adjusted EPS figure of 5.15p, although as with many things that's a personal judgment that each investor is free…

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