Small Cap Value Report (Tue 13 Feb 2018) - Car Dealerships Special

Monday, Feb 12 2018 by

Hi, it's Paul here.

At the suggestion of Matylda, I'll be doing a car dealerships special today. This is because Pendragon (LON:PDG) has reported its 2017 results, but there's nothing much else of interest on the RNS today. So I'll write about PDG, and compare it with 6 other listed car dealerships, being;

Vertu Motors (LON:VTU)
Cambria Automobiles (LON:CAMB)
Lookers (LON:LOOK)
Inchcape (LON:INCH)
Marshall Motor Holdings (LON:MMH)
Motorpoint (LON:MOTR)

I started quite late today, so this article will gradually take shape throughout this afternoon.

Pendragon (LON:PDG)

Share price: 24p (up 14.6% today)
No. shares: 1,424.1m
Market cap: £341.8m

(at the time of writing, I hold a long position in this share)

Full year results - for the 12 months to 31 Dec 2017

We are the UK's leading vehicle online retailer with 184 franchise points and 27 used retail points.

We represent a range of volume and premium products that we sell and service which include:  Aston Martin, BMW, Citroen, Dacia, DAF, Ferrari, Ford, Harley-Davidson, Hyundai, Jaguar, Land Rover, Kia, Mercedes-Benz, MINI, Nissan, Peugeot, Porsche, Renault, SEAT, Smart and Vauxhall.  

Brand names include: Stratstone, Evans Halshaw and Quicks.

Note the emphasis on online sales. This is rather interesting, as Pendragon is not a vanilla car dealership chain. It also has a software business, which is material to group profitability - see table below;


The first column is calendar 2017. The second column is the 2016 comparative. As you can see, group operating profit fell from £101.2m to £83.8m. This was expected, since UK new car sales fell sharply in 2017. The suggested reasons for this include: Brexit-related uncertainty, higher prices due to sterling devaluation, lack of consumer confidence, and uncertainty over diesel vehicles caused by a shift in Government policy.

Other issues which might be hurting sentiment towards the sector include the likelihood of electric cars growing in popularity - and requiring less attention in garages. Also, ultimately…

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Pendragon PLC is an automotive online retailer. The Company's principal market activities are the retailing of used and new vehicles and the service and repair of vehicles (aftersales). Its segments are Stratstone, which consists of its vehicles, truck and commercial vans brand, including the sale of new and used motor cars, motorbikes, trucks and vans, together with associated aftersales activities; Evans Halshaw, which consists of its volume brand, including the sale of new and used motor vehicles and commercial vans; US Motor Group, which consists of its retail operations in California in the United States, including the sale of new and used motor cars; Pinewood, which consists of its activities as a dealer management systems provider; Leasing, which consists of its contract hire and leasing activities; Quickco, which consists of its wholesale parts distribution businesses, and Central, which represents its head office function and includes all central activities. more »

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60 Comments on this Article show/hide all

nickchivers 13th Feb '18 21 of 60

In reply to post #314673

If you're doing a motor theme - interesting bit of background in today's Torygraph business:

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kenobi 13th Feb '18 22 of 60

I want to complain Paul, this is outrageous, why is IQE not on your list ?? surely someone somewhere has said something that demands comment ? I saw a monty python sketch and one of them ordered Spam Spam, Spam with a side order of IQE, so get your finger out and put it on your todo list, infact it should have it's own section every day, and email updates in between

(ok I've built it up enough now ! ) , just in case this isn't clear this is a joke, based on how often iqe has been in the news lately, and if you have to explain it, it's probably not funny, (which is what my kids always say about me)

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sharmvr 13th Feb '18 23 of 60

While we are doing a car dealership special, S&U (LON:SUS) released update on Friday, covered by Graham. Their outlook statement was pretty bullish (although the commentary in general is like that) - personally I find the tone endearing!
Of particular note I found was comment that the economic benefits of Diesel are clear for their customer segment and that used car prices should hold up as new sales have slowed down this year.
Both good signs?
I hold Vertu Motors (LON:VTU) from list above.

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SmallCappy 13th Feb '18 24 of 60

"Also, ultimately cars could become self-driving, hence fewer people would want to buy their own car."

I think this is a false assumption. A taxi is effectively a self-driving car but most people prefer car ownership. And a self-driving car without a taxi driver would open up new experiences to the excesses of human nature which our taxi driver currently does his best to eliminate. And if you suggest that the publicly available driverless cars of the future will be monitored by Big Brother that will be another reason for most to prefer ownership. And just think of the things you keep in your car that help you through the day - medicine? umbrella? change of pants? etc

I don't see the car manufacturers letting us off the car ownership leash any time soon.

Of course, a Marxist government might force it upon us but the stock market will be FUBAR in that case.

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janebolacha 13th Feb '18 25 of 60

In reply to post #314728

"I'd also like to hear more of Paul's opinions on UP Global Sourcing Holdings (LON:UPGS) - as and when appropriate. Ta!"

Worth noting that James McCarthy, the Chairman, who bought 300k shares at 33.4p yesterday and who now owns 1% of the company, is the former CEO of Poundland. He ought to be capable of recognising a bargain when he sees one!

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dangersimpson 13th Feb '18 26 of 60

Scientific Digital Imaging (LON:SDI) looks like a distressed seller. Placed directly with others via broker since bid-ask both still above the deal price.

Re: Marshall Motor Holdings (LON:MMH) remember to factor in the pro-forma effect of the sales of Marshall leasing into any analysis so that the company will report minimal net debt at 31st December vs £101m at 30th June. I expect the Stockopedia Quality ranking to increase accordingly as the Altman & Beneish scores reflect the balance sheet strengthening.

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runthejoules 13th Feb '18 27 of 60

In reply to post #314788

Small cappy, I don't think the issue is about whether people want to own their own car or not but how much insurance for human drivers will be increased the moment self-driving cars become statistically safer. And a comparison to a taxi now is false, because with a taxi you are paying for the driver's entire livelihood. With a self-driving car, just the car.

Anyway, the assumpton is 'fewer people would want to buy their own car', not that nobody would, and this is already happening, as Paul notes.

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SmallCappy 13th Feb '18 28 of 60

In reply to post #314808

my point is that people will continue to want to own cars, self driving or not.

"Also, ultimately cars could become self-driving, hence fewer people would want to buy their own car."

this is the point I was addressing

I think this is a false assumption

If fewer people are buying their own cars at the moment it it has nothing to do with the issue I addressed

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Effortless Cool 13th Feb '18 29 of 60

In reply to post #314808


The insurance costs for car drivers are based on their expected claims costs. These costs will not "be increased the moment self-driving cars become statistically safer". They might even reduce somewhat, as the roads become safer overall.

The insurance requirements for a self-driving car will be materially different from those of a car controlled by a human, in any case. Effectively, liability for any fault will shift from the driver to the producer. The nature of the risk changes massively too, from largely independent individual human errors to systemic issues with individual components.

Rather than the motor dealers, it is the motor insurers that should be worried, I think.

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Private_Investor_Blog 13th Feb '18 30 of 60

Paul, this might interest you : Audioboom is reverse taking over a Canadian company so its shares were suspended. Here's the Alliance Nerws summary :

"Shares in Audioboom Group PLC were suspended Tuesday after the podcasting platform announced an USD185 million cash acquisition of Triton Digital Canada Inc and amid a trading performance ahead of its expectations.
Audioboom said it has agreed to buy audio technology services firm Triton Digital Canada - parent of Triton Digital Inc - in a USD185 million all-cash deal. Audioboom's shares were suspended from trading as the transaction would constitute a reverse takeover under AIM rules."

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runthejoules 13th Feb '18 31 of 60

In reply to post #314823

That's a good point on insurers, Effortless. Could be worth shorting some... perhaps I should have said that insurance for human drivers will become *proportionally* higher. But there will also be a Red Queen effect in terms of productivity - in the gig economy, driving time will be time you could spend working on the way to work.

We also have to think of how much space garages and parking take up. Only ubering a self-drive when you need one will free up another room in your house, apartment block etc. So which would you rather have? Or if you have no garage, would you rather not have to bother to find a parking space? The effects will be most concentrated in urban areas where space is a premium and some can just jump on a rental bike.

For those who do want to own cars vertical integration a la Tesla or BMW showrooms threaten independent dealerships / renters / garages.

This is why any car dealer needs to have a strong NAV backup. Happy to hear counterarguments!

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Ben1 13th Feb '18 32 of 60

On the subject of driverless cars and the effect on car ownership.

I read somewhere the view that for many people part of the pleasure of car ownership is the driving experience. Take that away and people will be less interested in what they are driving in, and will hire rather than buy a driverless car.

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DJCP 13th Feb '18 33 of 60

In reply to post #314673

Paul: "Matylda - that's a great idea, for me to do a car dealership shares special today, due to there being results out from Pendragon (LON:PDG) but little else of interest."

A great idea on a quiet(er) SCVR news day, and even better, where there has been a relevant update for a company in a particular sector. i.e. PDG today.

Perhaps we could suggest some more sectors/similar companies, for when you're bored ! lol
Retail fashion - you may know a little about this ;^)
Online retailers
Finance (?) - Graham's forte
Frauds (ok, 'convenient accounting policy companies' !) - to see the similarities and what red-flags to spot in future
Semiconductor manufacturers - Only added this to please kenobi (post 22) :o)
Blue-sky companies - Just to see the revenue/loss ratios !
Companies with large pension deficits relative to market cap - Recently topical on SCVR

I'm not sure if you'd be able to announce what you'd be looking at in advance, but that would enable readers to offer company suggestions, for you to select from.

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hayashi22 13th Feb '18 34 of 60

Plenty of people like driving cars -would always buy a manual etc. Go into the newsagents and you will hundreds of car mags all catering for a car crazy population. Take the point that youngsters may be less inclined to drive than their parents.

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ricky65 13th Feb '18 35 of 60

In reply to post #314723

re Scientific Digital Imaging (LON:SDI) fall. I don't know why it's fallen on high volume. It seems to face big selling pressure ariound the 34-35p area - March 2017 and again recently. Seems to be a well run company and I traded it for a profit last year. It's on my radar if it meets my criteria again. I never buy microcaps when they've sold off on high volume as I'm wary insiders are selling out before bad news is made public.

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Effortless Cool 13th Feb '18 36 of 60

I think it's a decades long strategic risk for the motor insurers, runthejoules, with too much scope for good news in the short-term to be able to support a short trade.

Your point on space and vertical integration are well made. I wholly agree on the strong NAV backup.

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davidjhill 13th Feb '18 37 of 60

Hi - sorry to be slightly off topic but what is the investor event Paul was waxing lyrical about recently in one of these reports? I forget the name (not the ukinvestorshow)

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Zipmanpeter 13th Feb '18 38 of 60

In reply to post #314848

FWIW, I also love the promise ofsome periodic 'sector special' general thoughts to complement the share specific analysis. Even after you select a share for analysis or review after news, analysing competitors makes sense - especially as there is usually commentary about broader issues eg electric cars, brownfield opportunities for car dealers on todays topic.. As I own Vertu Motors (LON:VTU), car dealers will be especially good !

My vote for sectors of (general) interest would be for example
* Retail (Paul) - almost anytime since always someone reporting something !
* Non-standard Finance (Graham) - upcoming Non-Standard Finance (LON:NSF) (on Fri 1st March?) vs Morses Club (LON:MCL) vs Provident Financial (LON:PFG)

I hold Non-Standard Finance (LON:NSF) but only after being drawn to Provident Financial (LON:PFG) and looking at its competitors including Non-Standard Finance (LON:NSF)

BTW, I always learn something from these this column and look forward to them coming out each day. Also astonished that authors are willing to take suggestions. Thanks as ever for such a great blog.:)

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tic_tac_toe 13th Feb '18 39 of 60

In reply to post #314898

David. I expect you mean Mello2018

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davidjhill 13th Feb '18 40 of 60

In reply to post #314933

that'll be the one. thanks tic tac

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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