Neil Woodford is buying more AA shares – I’d suggest you don’t follow him

AA breakdown van © Getty
The AA is facing a wave of technological disruption

I’m not someone who is very interested in cars. I can change a tyre (though I haven’t had to for years). Maybe a bulb (except they’ve made that a lot harder on newer cars). I can top up the oil and the windscreen wiper fluid. And that’s about it.

So I have been buying breakdown recovery insurance on my cars for nearly two decades now. And it’s been well worth it.

We’ve always been a single-car household, but nearly every one of those cars has required a call-out from roadside rescue at least once. Indeed, I’m pretty sure there was one year where we used it at least five times.

On one particularly memorable occasion, I remember one poor guy having to recover my wife and I and our useless vehicle all the way from North Yorkshire to southwest Wales (it’s a long story).

Why am I telling you this?

Because today we’re looking at another roadside wreck – the AA.

Should you follow Neil Woodford and buy AA?

The AA has not been a good investment. As Lex in the FT points out, anyone who bought the company when it listed in 2014 has now lost nearly two-thirds of the value of their stake. That includes poor old Neil Woodford, who is rapidly turning into the ultimate contrarian indicator.

Woodford now owns more than 15% of the AA, having bought more after its latest profit warning, which came out on Wednesday. But should you follow him? Well, let’s have a look.

The AA has been struggling for a while. The former chief executive, Bob Mackenzie, left in slightly odd circumstances last year after an alleged punch-up in a hotel bar. (It happened during a strategy meeting with senior executives, so on second thoughts, perhaps the punch-up isn’t that surprising). Naturally, that took its toll on the share price.

However, there’s a much bigger problem. The AA is a motoring services group. It has a great brand. It has a loyal (if dwindling) customer base. But this is a highly competitive market facing long-term decline.

Cars are getting more reliable. While I’ve used roadside recovery a lot over the years, the usage has definitely decreased over time. And that’s not because my current car is any good compared to the others I’ve owned. It just happens to be less prone to breaking down.

Roadside assistance is increasingly commodified. I don’t know about you, but for me, it’s one of those things you buy via a comparison site and choose the cheapest one you can find. I’ve used a number of different providers over the years and they’ve all been perfectly good at their jobs.

Meanwhile, the AA is carrying a massive lump of debt, a leftover from the lovely private equity people who had their wicked way with the company then flipped it back onto the market in 2014.

So if you own the AA, you own a wonderfully cash-generative asset, but one that’s in a declining business and comes with a massive mortgage.

And Wednesday’s profit warning was all about confronting that. So has it done enough to make the AA a buy?

The bondholders are in charge, and we’re heading for a risky reinvention

Firstly, the dividend was slashed. It fell from 9.3p to 2p, and that will be it for the foreseeable future. The message there is clear: the bond holders are in charge here. Probably the only reason they didn’t ditch the dividend altogether was to spare Woodford’s blushes and avoid making it seem like an emergency situation, rather than a chronic one.

Secondly, the company is going to increase investment. So rather than running down the existing business, the goal is to reinvent it for the 2020s and beyond. That means lower profits today, but hopefully more jam tomorrow.

That’s admirable and we all want companies to invest more in their workforce and technology and all the rest of it. However, it’s risky. Dividend cuts and turnaround plans can be a good opportunity to buy a company. It’s often the point at which things stop going from bad to worse. But here I’m not so convinced.

For a good turnaround opportunity, I want to see a fundamentally decent business that has grown complacent, or invested too much in ambitious over-expansion (cyclical industries do this all the time) or dud brand extensions. I also want to see some progress already being made.

That’s not the case here. The AA is basically looking at a blue skies reinvention. The company realises that somewhere in the future lie even more reliable cars (electric cars – I’m told, though I’m willing to be corrected – are more reliable and easier to fix than combustion engines).

There’s also the increasing danger that self-driving cars will hit the roads, which could entirely destroy both the current ownership and car insurance models. We’ll all be summoning taxis with our phones, and the only people who will actually own cars will be big companies. You’ll order a Google taxi with your Pixel phone, or a Tesla with your iPhone, or whatever.

In short, the AA is facing a wave of technological disruption along the lines of that faced by the music, publishing and broadcast industries over the past two decades.

Its big idea for tackling that, and getting younger members on board, is to encourage users to install a telematics device and app (Car Genie) that will produce data, predict breakdowns before they happen, and hopefully make it easier for the AA to sell other services – including insurance – to existing members.

Can it do that?

The execution risk here is massive

Well, here’s a thing. I went to the AA website (as someone who doesn’t know much about cars and the related telematic tech – indeed, perhaps the sort of customer the AA might want to target) to try to learn a bit more about the Car Genie app.

There was a link that said “How to set up Car Genie”. I clicked on it, and the first step said “Check the device is compatible with your car”. I clicked on this link to check if my car was indeed compatible with Car Genie.

But instead, the link went direct to a relocation page that told me nothing about Car Genie, but did tell me that I could now buy AA products direct from Amazon.


If this is going to be the flagship product, they need to be on top of these things. (Editor’s note: and to be fair to them, the AA did contact us after seeing this story and have now fixed the error). This is a problem with having a good brand. You often get complacent. Marks & Spencer is probably the best living example of this in the UK.

A brand will only take you so far. You look at your core of loyal customers who shower you with praise and you comfort yourself, even as new customers are drawn to faster, hungrier rivals, who do everything you do, without acting as though they’re doing their customers a favour by even deigning to deal with them.

So overall, this sounds like an ambitious but risky plan, which is right at the start of its execution, with poor visibility as to the outcome.

It reminds me a little of Pearson’s ongoing attempt to turn from being a publisher into a “provider of education services”, the most visible outcomes of which so far, have been the now-predictable issuance of annual profit warnings, and the miraculous ability of the chief executive to hang on to his job.

Now, here’s something to bear in mind: I don’t have great expertise or inside knowledge of the breakdown recovery business or the telematics business or the motor insurance business. Those fall outside my “circle of competence”, as it were. Maybe you work in one of these businesses, or supply them.

Maybe you are in a position to see an area here where the AA has a genuine edge. Maybe you can see something that I can’t see, that makes the prospects of success far greater. If you do, please feel free to share it with us below.

But for me, this is a business plan that’s based too much on hope for now. I’d be happy to keep an eye on the business and see how it’s going during the next update, but I certainly wouldn’t buy in now.

  • andrew moffat

    When I read the subject line of your article, I laughed aloud. Woodford’s strategy over the past year or two has been to double up on his investment, each time a company’s share price has collapsed. Provident, Capita and AA are just three examples, which have become something of a routine for his activities. Often, one profit warning has been followed by another and each time Woodford then tops up, when he should be cutting his loss. I rather fear that he is now becoming something of a joke and his funds are far too big to allow him any nimbleness of foot; how do you offload 15% of the AA without moving the market?
    I wonder when the next disaster will arise? He has plenty of companies in his funds, so one of these is bound to follow and issue a profit warning.
    The massive debt overload at the AA was another factor. How could it grow its dividend under these circumstances?
    This, in turn, brings us to the next point: private equity is engaging in activity that, in many (but not all) instances is harming and sometimes destroying companies. The practitioners make a killing out of this, usually by placing a vast burden on the companies in the form of debt – from which they extract their salaries and bonuses. This entire matter should be the subject of an enquiry by the relevant Commons’ Committee; few businesses can survive when afflicted with eye-watering debt loads.

    • Contrarian Investor

      But investors still buy these at IPO. The only way to stop PE from doing this is for investors to wise up. A few failed IPOs and the PE’s will pursue a different strategy.

  • Londrum

    you mentioned that mistake on their website… well here’s another one, but much more embarrassing… i did some driving lessons with AA a few months ago and signed up through their website, and received the usual kind of automated email back thanking me for signing up. Unfortunately the link they provided within it was to the website (which redirects to the American Airlines website), and not website.
    This was in the welcome email that they send out to new customers.

    i did email them about it, so maybe they’ve fixed it now.

    • Bab Boon

      I drink to that ………. Or is that the other AA?

  • Les Blakey

    The AA was in fact one o the most stand alone reliable outfits anyone could envisage. They owned every vehicle they ran 5000. they had a massive equity in buildings and depots all over the uk from Scotland to cornwall to Norwich and west wales. an army of over 4500 highly skilled engineers with a fantastic training network behind the scenes. They owned widmerpool hall in Nottinghamshire which was their very own college. Every patrol had senior experienced people watching his back and a fleet of recovery trucks when a roadside repair was not achievable. The membership of this club was conned into turning it over into the private sector. Centrica bought it up and set about Asset stripping. sold widmerpool, sold the vehicles, now they rent, sold the depots and hospitality stop overs, stripped out the patrol force, shut down the command centres and sold the buildings , then moved the AA on. and several owners since have done the same. all that is left is a man with a rented van and they are busting a gut to keep it going. I know this to be a fact.

    • Bab Boon

      But they HAVE moved into running the ‘Speed Awareness’ so beloved by the drivers compelled to endure them, which of course endears drivers to the AA in general.

      Oh, wait a moment on the last thought…….. Make that:
      Which ensures any sane person will hate the AA for jumping on the speed camera money-making scheme bandwagon when they ought to be campaigning for genuine, meaningful pro-saefty issues like driver awareness.

      But then, do they still campaign beyond spouting occcasional empty, popularist sound-bytes?

      • disqus_YyWy2q65Lh

        I put the wrong type of fuel into my van. The end result from calling the AA was to be put in touch with an outsourced garage specialising in fuel draining and system cleaning of vehicles. quote £250… I refused. My local garage did it for £130 inc.

        Yes everyone from shareholders to customers have been and are being fleeced. It is unfortunately the end of the road now.

        • James Corwin

          How has your vehicle been since the fuel draining?

    • Jab

      Yes, agree that this kind of asset stripping is putting off investors like me.Yet the gvt does nothing, the UK stock exchange is turning into something to avoid fit only for gangsters and flash boys.The golden goose is being strangled.

  • Good article.

    I have no idea if AA is a buy or a sell. But the important point is that like all services, provision is being commodified. Which means access and reach are the most important qualities of a front-end provider. The old membership model is likely to die, as Uber-style websites take over. These will link the broken down motorist to local garages directly. Probably with the usual star ratings etc. Where can the AA fit in? Well, as a vehicle owner it would provide breakdown services via such a portal, but I don’t foresee the AA as being the portal of choice.

    So if Uber or a similar company starts a breakdown service portal then AA either has to lose its front end or close down, selling its fleet to a competitor or merging with them. That would be damage limitation, rather than innovation.

    So unless we see evidence of the AA motoring into the 21st century, the shares are a value play at best.

    • GMAC

      If the Woodford is buying I am selling, or at least on a debt:equity ration, definitely not buying in a rising interest rate environment