Gamble of the week: A car dealer with growth potential

Britain’s car market is booming. New car registrations grew by more than 8% in April – the 26th consecutive month of growth. New car sales are forecast to top the pre-recession peak of 2.4 million this year.

That’s good news for the likes of this Aim-listed company, the sixth biggest car dealer in the UK. But how long can the good times last? The market for new cars in Britain looks increasingly like a debt-fuelled boom, with nearly four out of five cars bought on credit.

Economies across Europe have been weak and this means that car makers have to find a home for their output to keep their factories busy. UK consumers have snapped up the tempting cheap finance deals they are offering. In fact, it seems that many of them are renting cars for three years rather than buying them outright.

This has been good for the car dealers. But what happens when interest rates rise and car finance becomes more expensive? Also there’s a risk that the price of used cars could fall, which could be a problem when there are lots of three-year-old ones to sell.

Surely the easy money has been made in the shares of car dealers? Maybe, but the investment case for Vertu Motors (Aim: VTU) isn’t just linked to selling more cars. Selling new cars isn’t very profitable. You have to sell lots to cover all the costs.

There’s a lot more profit to be made after the car has been sold, from servicing and spare parts. This accounts for less than 10% of Vertu’s sales at the moment, but has scope to increase given the growth in the number of new cars out there.

Vertu Motors share price chartVertu was created to buy up underperforming dealerships and make them more profitable. In the seven years it has been in business, it has grown to 108 dealerships.

After starting out with the big volume brands, such as Ford and Vauxhall, it is now moving more upmarket with Volkswagen, Land Rover and Jaguar dealerships. By building up scale with the manufacturers, it can buy better and make more money.

Vertu has said that it will keep on buying dealerships. With many of the ones already bought yet to fully mature, this should continue to be a good source of profit growth. And with £31m of cash on its balance sheet, it is not short of money, so it is perfectly able to do this.

Combine this with more aftermarket sales and there is scope for Vertu’s wafer-thin profit margins – of just over 1% – to increase. The shares are quite risky, given the dependence of new sales on debt; but trading on just over 12 times earnings, they look worth a punt.

Verdict: buy at 57p


Claim 12 issues of MoneyWeek (plus much more) for just £12!

Let MoneyWeek show you how to profit, whatever the outcome of the upcoming general election.

Start your no-obligation trial today and get up to speed on:

  • The latest shifts in the economy…
  • The ongoing Brexit negotiations…
  • The new tax rules…
  • Trump’s protectionist policies…

Plus lots more.

We’ll show you what it all means for your money.

Plus, the moment you begin your trial, we’ll rush you over THREE free investment reports:

‘How to escape the most hated tax in Britain’: Inheritance tax hits many unsuspecting families. Our report tells how to pass on up to £2m of your money to your family without the taxman getting a look in.

‘How to profit from a Trump presidency’: The election of Donald Trump was a watershed moment for the US economy. This report details the sectors our analysts think will boom from Trump’s premiership, and gives specific investments you can buy to profit.

‘Best shares to watch in 2017’: Includes the transcript from our roundtable panel of investment professionals – and 12 tips they’re currently tipping. The report also analyses key assets, including property, oil and the countries whose stock markets currently offer the most value.