After falling 40%, do Vertu and Lookers signal a buy, or are something amidst that we haven’t discover?

Before you take a dive into these car dealership stocks, how about we look into the sector as a whole? Explore where the car dealership market is trending. Understand what is driving (financing) the car demand in the UK.

After that, you can decide if these stocks or the sector as a whole is worthy of investment.

Afterwards, we will explore the scenarios for both Vertu and Lookers by making assumptions on their future earnings. This will help us to avoid “value traps” set by the market.

 

A Macro Perspective

Here is a chart showing the level of new car registration in the UK: 

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Source: SMMT.co.uk.

One reason for achieving five years of unbroken growth is thanks to low oil prices. 

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Notice the rise in oil price, typically signal slow growth or bring about a decline in new car registration. But, that isn’t all. The way car financing has changed over the past decade has helped to boost demand.  

 

PCP Financing, what’s all about?

With rents and mortgages rising and wages stagnating, how are people able to pay for cars upfront?

The solution PCP financing

PCP stands for personal contract purchase and is a loan to help you get a car.

Here how it works:

You typically pay a 10% deposit on the value of the car. The amount you borrow depends on how much value is lost over 24 or 36 months. This means you don’t pay the full value of the car. Typical APRs are 4%-7%. 

 

Example

Let's imagine you sign up for a PCP over three years to buy a car with a ticket price of £18,000. You put down a deposit of £2,000 and the finance company calculates that the car will be worth at least £8,000 after three years. Here's how that would look...

To 'borrow' the car you pay... Deposit: £2,000 Loan: £8,000 (£10,000-£2,000) plus interest  Total: £10,000 plus interest

To buy the car you pay... Deposit: £2,000 Loan: £8,000 (£10,000-£2,000) plus interest Balloon payment: £8,000 Total: £18,000 plus interest

(P.S. The above is a typical example from…

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