Investment Column: Used cars take the shine off Arriva

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FIRST Car Group, now Arriva. Two companies complaining of falling used car prices on consecutive days suggests the market is tough. And judging by the share price reaction of other firms with an exposure to the second hand motor market, more gloomy trading statements could be on the way.

The problem is residual values. Given chronic overproduction by the large European car manufacturers, the UK market suffers from regular bouts of indigestion. Since manufacturers do not allow dealers to cut prices, they respond by leaving cars on the forecourt for a few months before selling them as "nearly new" at a heavily discounted price.

This is good news if you're buying a car. But it's disastrous if you're selling them - like Car Group - or dependent on the price you can get for them after they've spent six months in your leasing fleet - as Arriva showed yesterday.

The company formerly known as Cowie has responded by putting the leasing business on the market. With financial giants like GE Capital on the prowl, it should have no trouble finding a buyer.

Chief executive Gordon Hodgson insists that the car dealerships are not for sale. But without the leasing business, there is little point in keeping them. What's more, if Arriva were released from the drag of its unfashionable leasing and distribution businesses, the market might attach a decent rating to its bus businesses.

Not that this makes Arriva shares worth buying. Say the leasing and motor businesses could be sold for pounds 500m. At the current share price - which slumped 70p to 370p yesterday - this would leave the bus businesses trading on a punchy historical p/e ratio of about 24. So avoid Arriva for now. And while the used car market remains grim, steer clear of Lex and Avis Europe as well.

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