Car-related stocks are accelerating through the threat of ride-hailing services, self-driving vehicles and “peak car”, where young inner-city residents shun owning one.
Some of the market’s best performers this year have been car or motorcycle parts distributors, panel beaters, novated car-lease providers and car advertisers.
Super Switzer Report analysis of 15 car-related stocks (see below) shows some big gains. Salary packager and vehicle-services provider Smartgroup Corporation has a 168% total return (assuming dividend reinvestment) over 12 months to August 2016.
Share market newcomer PWR Holdings has raced to $3 from its $1.50 issue price after raising $81.8 million and listing on ASX in November 2015. PWR designs and makes cooling systems for high-performance cars in most of the world’s leading car championships.
Another float, Motorcycle Holdings, has starred. Shares in the motorcycle dealership rallied from a $2 issue price to $3.71 after listing on ASX in a $46 million float in April 2016. The company upgraded its prospectus forecasts in July.
Listed panel beater AMA Group has a 67% total return over year. Impressive parts distributor Bapcor (formerly Burson Group) is up 58%. I nominated Bapcor as an Initial Public Offering to watch for this report in December 2014.
More established car-related stocks have also performed. Perennial star Carsales.com is up 43% over one year, despite recurring fears it is overvalued. Four-wheel-drive parts marker ARB Corporation, one of the market’s best-regarded small-cap stocks, is up 36%.
Big car dealerships AP Eagers and Automotive Holdings Group have returned 24% and 23% respectively. Automotive Holdings, 19.8% owned by AP Eagers, is included in the Switzer takeover portfolio.
Not all car-related stocks have performed. Former market darling McMillian Shakespeare is flat over one year, but well up on its 2013 low after proposed fringe-benefit tax change terrified investors. Previous high fliers’ iCar Asia and Infomedia have also disappointed over one year.
But the overall performance of car-related stocks has been surprisingly strong in an otherwise subdued share market over 12 months. The aggregate performance is even more impressive, given a patchy economy and the Federal election (never good for retailers) this year, and growing fears about consumer confidence and retail sales growth in the next 12 months.
Speculators have benefited. Early investors in lithium producers and explorers, developing lithium-ion batteries for electric cars, have had huge gains. It is too much of a stretch to include lithium companies in this analysis, but their performance is worth pointing out.
The key question is whether the gains can continue in the short term. And if medium-term threats such as greater adoption of ride-sharing services and, later, autonomous vehicles, stop traditional car makers, parts suppliers and related car-service businesses in their tracks.
Seasonally adjusted new-car sales have edged higher since May 2015, after solid gains between 2009 and 20012 took the industry past its peak before the Global Financial Crisis, Australian Bureau of Statistics data shows.
Trading Economics forecasts quarterly total vehicle sales to average about 100,100 in 2020, from about 98,000 now. Within that slow growth, expect vehicle sales to private owners and government departments to fall, and higher sales to business fleets and rental companies.
Record-low wages growth, weaker house-price growth and rising fears about job security will weigh on cars sales this decade, offsetting the appeal of cheaper finance.
Another worry (for car-related companies) is the threat of deflation lowering car prices and margins. More vehicles being leased rather than bought ultimately means more vehicles returned at the end of the lease to dealer lots. An increasing supply of higher-quality used cars has to pressure new vehicle prices over time.
Longer term, the launch of self-driving vehicles will reshape society, affecting car makers, dealers, governments (that rely on fuel excise tax), infrastructure companies and the community. But this trend will take longer to go mainstream than is widely realised, such are the regulatory, insurance, technical and safety challenges from self-driving vehicles.
The concept of “peak car” is a threat, with Sydney and Melbourne’s population expected to double to around 8 million each by 2050. As cash-strapped governments struggle to keep up with transport infrastructure, more consumers, particularly those in inner-city suburbs, will question whether owning a car is worth it. But that threat is also some way off.
To my thinking, on-demand car and ride-hailing services pose the biggest medium-term threat. As it becomes easier and cheaper to order cars via your smartphone, owning a car and paying for its upkeep loses some appeal. Families will always need a car, but individuals might use their car less or resist buying one as on-demand car services become mainstream.
Car-rental companies could disrupt the market. The traditional model of owning one or two cars makes less sense as investors demand different vehicles for different purposes. Car-rental companies could fill this market gap through product and business-model innovation that allows consumers to rent different car models on demand, at lower cost.
Short- and long-term trends do not favour all car-related stocks in developed markets. But value still exists for investors who can pick stocks on the right side of these trends. Companies with growing emerging markets exposure in car markets, strong industry positions and scope to growth sustainably through acquisition. Here are three to watch:
1. Bapcor (BAP)
The car-parts supplier has been one of the market’s best IPOs in years. After raising $220 million and listing on ASX in April 2014, its $1.82 issued shares have rallied to a 52-week high of $5.78.
The Victoria-based company is Australia’s largest trade-focused automotive-parts distributor, distributing to more than 30,000 workshops and customers in wholesale and retail.
I favour Bapcor for two reasons. First, it has an excellent industry position. Bapcor’s distribution networks mean it gets parts to workshops on a same-day basis. That, in turn, helps mechanics get more volume through their workshops. I doubt the market has fully recognised the value of Bapcor’s competitive position and its barriers to entry.
Second, urbanisation and city densification mean greater traffic congestion in the next five years, more time stuck in cars and greater vehicle wear and tear. That should drive rising demand for Bapcor’s efficient parts-distribution service and some pricing power.
At $5.78, Bapcor trades on a forward Price Earnings (PE) multiple of 25, according to consensus analyst estimates. That’s high for a small-cap stock, but Bapcor has earned its valuation premium.
Bapcor was due to report earnings as this Switzer Super Report was published. Like other high fliers in this reporting season, Bapcor could sell off when earnings are released, after earlier price gains. That could create an opportunity for long-term investors.
Chart 1: Bapcor
Source: Yahoo Finance
2. Carsales.com (CAR)
Like Seek and REA Group, Carsales.com always looks expensive on valuation metrics, but keeps delivering faster-than-expected earnings growth and justifying its high valuation.
Carsales’ latest full-year earnings result, released last week, was no exception. Underlying earnings for FY16 rose 10.3% to $170.3 million, beating several broker forecasts.
Strong second-half revenue growth across all of Carsales’ online advertising and data-research services featured, as did profit margins being maintained at 50%. Carsales continues to grow internationally, completing acquisitions of companies in Chile and Mexico in FY16 that bolster its Latin American presence. Carsales also owns 20.2% of iCars Asia, a fast-growing vehicle-advertising platform in South East Asia.
Carsales’ expanding international networks are the key to its long-term fortunes. Investors have been prepared to pay PE multiples up to 30 for Carsales, for it is predominantly an Australian operation. As the company’s international operations become a large part of overall revenue, albeit off a low base, Carsales should justify a higher valuation multiple.
Carsales looks cheaper than Seek and REA Group, but at $13.43, trades above the $12.50 target price from consensus broker analysts. The market has consistently underestimated Carsales’ earnings trajectory – a trend that should continue in the next few years.
Chart 2: Carsales.com
Source: Yahoo Finance
3. AMA Group (AMA)
I’m always wary of industry consolidators that grow by acquiring smaller firms. Too many come unstuck as they grow too quickly and dilute shareholders with equity issuance.
AMA is an exception. The listed panel beater has a terrific long-term opportunity to consolidate a panel beating industry that consists of thousands of small firms, is highly fragmented and reasonably defensive.
Like Bapcor, AMA will benefit from more cars being on the road for longer, as capital-city traffic congestion worsens in coming years. Sadly, that means more accidents and work for panel beaters, despite car safety improvements.
AMA reported a strong interim result in February and should do the same again when it reports its full-year result this month. Like Bapcor, it is a candidate for profit taking after solid recent price gains, upon its earnings release.
At 96 cents, AMA trades on a forecast PE multiple of 19 times. But the consensus, based on a few analysts who cover the stock, is too small to rely on.
AMA can do better than the market expects as it grows organically and through acquisitions over the five years. As a small-cap stock, it suits experienced investors and is best bought during bouts of price weakness.
Chart 3: AMA Group
Source: Yahoo Finance
Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at Aug 17, 2016.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
