Shares: Hitch a ride on a nice little runner: Profits and sales are gearing up for the climb back as car distributors turn the corner

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The Independent Online
ANY READER thinking of buying a second-hand car should act quickly. Trevor Finn, head of the luxury cars distributor Pendragon, says shortages of some models are likely to lead to rising prices, closing the gap with new cars. This trend is a consequence of so few new cars being sold over the past three or four years.

Such trends are good news for the car distribution industry generally. It is at an early stage of what could be a sustained period of rising profits. Share prices have moved up in anticipation of better times and significant profit increases. But there should be plenty more to come. There could also be a general firming of share prices ahead of the March season of reporting results for 1993. Most observers reckon that the absolute low point for the industry was in the disastrous second half of 1992, when second-hand car values were collapsing and amazing deals were available on new and nearly new cars. The second half of 1993 was much more buoyant, which may not have been fully allowed for by analysts in their profit forecasts.

On top of that, the accompanying statements should make good reading, with car sales generally expected to continue improving this year. Consensus estimates are for about a 10 per cent increase in sales, taking the annual figure to perhaps 2 million units. That compares with 1.8 million last year, lows of 1.6 million in 1991 and 1992, and a peak of 2.3 million in the boom year of 1989. The improving trend is expected despite the spring tax increases, because cars are now much more affordable after the plunge in interest rates.

Sales staff are in a position to tell potential customers that they can trade in cars bought three years ago while incurring no increase in monthly payments and probably with lower running costs.

The revival in demand promises to have a spectacular effect because of a number of other trends. In a nutshell, many of the top quoted motor distributors, such as Evans Halshaw at 454p, Pendragon at 294p, the newly rechristened Sanderson Bramall at 191p, Reg Vardy at 203p, and Appleyard at 152p, have used the recession to become more efficient, with significant cuts in staffing. At the same time they have been busy adding to their franchises and buying up weaker rivals.

Sanderson Bramall has been built by a motor industry entrepreneur, Tony Bramall, out of the shell of a former textile company. Evans Halshaw has added around a third more franchises during the recession. Most dramatic, Pendragon has gone from 19 franchises in 16 locations in 1989 to 65 franchises at 42 locations now. In 1989 the group made pre-tax profits of pounds 4.7m on turnover of pounds 180m. In the latest six months, reported profits were 42 per cent higher at pounds 3m, with a record-breaking pounds 7.5m expected for the full year and further strong growth likely in 1994.

A feature of the recession and the revival so far is that business has been much stronger north of the M4, and some of the luxury brands have had a particularly tough time. Jaguar sales, for example, fell by two- thirds from peak to trough. This creates equally strong recovery potential.

One company in the front line of the southern downturn has been the Ford specialist Dagenham Motors, which has a string of dealerships effectively circling London. Its chairman, David Phillips, has been using the recession to pick up additional dealerships at pounds 2m a time instead of the pounds 6m they might normally cost. Group profits are expected to recover to, say, pounds 2.2m this year against the pounds 1.5m reported for 1992, but that is well below the pounds 4m the group made on half the current turnover levels in 1988, and only a fraction of the pounds 6m to pounds 8m it should be capable of making when normal buoyancy returns to markets.

A wild card for buyers of motor trade shares is the possibility that this upswing in the cycle may lead to new peaks in profitability. All the groups make a large chunk of profits from related activities such as parts sales, service and body shop repairs and even forecourt activities such as selling petrol. In the recession, the contribution from these activities rose to 60, 70 or even 80 per cent of total profits. This contribution should remain stable or continue to grow while there is a dramatic rebound in profits on sales of used and new cars.

At the same time, there are signs of a shift in the balance of power from manufacturers to distributors, with groups such as Evans Halshaw opening huge multi-franchise outlets, including one in Solihull for Vauxhall, Peugeot, Rover, Land Rover and Mazda, which begins trading this month. Costs are lower and customers like the increased choice.

Del Barrett, an industry analyst at Albert E Sharp, the Midlands stockbroker, believes that such developments, plus the efficiency gains and the growing concentration of the industry, mean that overall margins in the current cycle could peak at around 4 per cent, rather than the 2 per cent that most distributors have settled for in the past.

If she is right, that would have strong implications for profits and would suggest that investors should rush to fill their boots with the shares of companies in the sector.

(Photograph omitted)

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