Bottom Line: Vardy accelerates ahead of the pack

A SMART recovery in the British car market in 1993 made most car dealer shares a one-way bet.

Reg Vardy, whose price rose by 30 per cent last year, has duly sped into 1994 with almost doubled pre- tax profits of pounds 3.5m, or an underlying rise of 51 per cent after stripping out an exceptional property gain of pounds 800,000.

The group, controlled by Peter Vardy, chairman, has proved one of the better performers in the motors sector through the recession, largely through an astute judgement of its market.

For example, when the new car market was struggling, it pioneered the strategy of concentrating on 'nearly new' vehicles - cars with low mileage but huge depreciation.

The customers loved it, while the company still made decent margins.

Now that the new car market has returned to rude health Vardy is reaping extra benefits as it has picked up new franchises and dealerships cheaply during the recession.

The structural changes in the industry highlighted recently by the stockbroker Albert E Sharp - lower stockholdings, for example - are also helping to lift margins across the board. But Vardy may do better than most.

Despite its fast growth, Vardy's balance sheet is in very good order. Gearing is likely to be around 10 per cent at the year-end if there are no more acquisitions by then.

Among the franchises acquired recently are two Mercedes dealerships and a Toyota outlet - two marques that are likely to offer rich pickings for dealers in the coming years.

Full-year profits of pounds 5.6m (ex the property gain) would put Vardy on a prospective p/e of just over 21 times earnings, showing that the stock market has factored in a lot more recovery.

In the medium to long term, though, Vardy's rating looks more justifiable than many of its peers'.