Kicking the tyres on super-cheap Automotive Holdings

Automotive Holdings current valuation isn't demanding, and it trades on an attractive fully franked dividend yield of 8.7 per cent. Scott Phillips kicks the tyres and gives this interesting car deal and logistics player the once over. You might like what he sees.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For many years now, Australia has been without a locally-owned major passenger car manufacturer.

We certainly have manufacturing and assembly plants belonging to the global automotive giants, but to invest in these businesses, you had to head to American, Asian or European exchanges.

One way Australian investors can have access – of sorts – to the automotive sector is through car dealer and logistics provider Automotive Holdings Group (ASX: AHE).

Consolidation and growth
With fewer international manufacturers and brands (through mergers and rationalisation), dealers have responded through a consolidation of their own – scale that provides increasing clout at the negotiating table with their suppliers, and greater economies of scale at an operational and marketing level for consumers.

60 years old, Automotive Holdings Group (AHG) has emerged from its roots in WA to develop a significant presence on the eastern seaboard of Australia and into New Zealand. The company has built an impressive network, covering over 100 dealerships, and almost all of the top car brands including volume brands such as Holden, Ford and Toyota and prestige marques like Porsche and Bentley.

The company also has a logistics division, with operations in automotive logistics (vehicle and parts distribution and storage) as well as a refrigerated transport business.

The Pac-Man of car dealers
AHG has primarily grown through acquisition, having bought dealership businesses in New South Wales, Queensland, Victoria and Auckland, New Zealand in the past 5 years, but also develops so-called 'greenfield' sites from scratch when the opportunity presents. It also acquired an additional logistics business earlier this year.

In a very competitive market, the company plans to continue to grow by acquisition, and is obviously reliant on the demand for cars and trucks by Australians.

Execution is king
AHG has form on the former, but it isn't without blemish. After a buying spree primarily in 2006 and 2007, the company has struggled to meaningfully grow earnings per share – in part due to continual share issuances which have taken the share count from around 140 million in 2004 to 260 million in 2011 – not far off double in 7 years.

Accordingly, while total profit has grown, EPS has lagged considerably. In the company's defence, consumer confidence has been lacklustre in recent years, and the last few years may not be representative of the future. Additionally, while shareholder dilution is never welcome, the company's balance sheet is better placed than if it had only used debt to fuel the acquisitions.

At the mercy of consumers
On the second front – demand for motor vehicles – the immediate past has been good news for new car dealers. The Australian Bureau of Statistics new car sales figures have shown robust demand, not withstanding a dip in May and June of this year. ABS statistics show that new car sales peaked (in monthly sales) towards the end of 2007, and had a tough 2008, before beginning to recover. Last month showed the highest trended sales figure in almost 4 years.

Encouragingly for current and potential investors, insiders own a significant portion of the company, and while AHG hasn't been shy of issuing new shares, the company's current debt load is quite small relative to shareholders equity and the interest bill is manageable.

Risk and return
An investment in AHG is not for the faint-hearted. The company's stated strategy of growth by both development and acquisition means you know what you're getting, but execution risk and the chance of management over-paying for an acquisition are ever present.

Equally, the company is at the mercy of the vagaries of consumer demand for new cars, and any economic setbacks have the potential to stall growth in the short and medium terms.

That said, if AHG can turn top line growth into consistent EPS gains (and it plans to use a sale and leaseback strategy to limit the need for additional funds), the company might deliver market beating returns.

Foolish take-away
With a price/earnings ratio of 8.8, a dividend yield of 8.7% fully franked and trading at only a small premium to book value, AHG's current price isn't demanding – but nor has its historical performance been stellar.

If you expect the Australian economy to continue its recovery, and consumer confidence to return (and lead to higher new car sales) AHG may well be one for your watchlist. If you're a bear, this might be one to avoid.

I'm not ready to buy just yet, but having kicked the tyres and taken it for a test drive,  this is one company I'll be keeping a close eye on for signs that it is turning straight-line speed into success on the investment podium – shareholder returns.

Are you looking for more quality stock ideas? Motley Fool readers can click here to request a new free report titled The Motley Fool's Top Stock For 2012.

Scott Phillips is The Motley Fool's feature columnist. Scott doesn't own shares in any company mentioned in this article. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

 

More on ⏸️ Best ASX Shares

Three travellers laughing and smiling outside an airport
⏸️ Best ASX Shares

If you'd invested $2,000 in Webjet (ASX:WEB) shares 10 years ago, here's what it would be worth now

The travel expert has proved a winner for long-haul investors...

Read more »

illustration of three houses with one under a magnifying glass signifying mcgrath share price on watch
⏸️ Best ASX Shares

The 5 best ASX real estate shares of the 2021 financial year unmasked

Office space, industrial storage, retail malls and residential. These companies cover them all.

Read more »

asx share price increase represented by golden dollar sign rocketing out from white domes of lithium
Energy Shares

5 best ASX energy shares of the 2021 financial year revealed

As the world emerged from initial COVID lockdowns, the demand for energy soared.

Read more »

best asx 200 shares of financial year 2021 represented by 2021 formed with gold piggy bank
⏸️ Best ASX Shares

Meet the best performing ASX 200 shares of FY21. Are yours on the list?

These companies have been crowned the best of the best in FY21...

Read more »

retail asx share price represented by shopping trolley full of cash
⏸️ Best ASX Shares

How I'd build a 'best stocks to buy now' list

Focusing on the quality and prices of companies from a diverse range of sectors could make it easier to build…

Read more »

asx share price on watch represented by investor looking through magnifying glass
⏸️ Best ASX Shares

How I'd aim to find top shares to buy in March 2021

Comparing companies with their peers and considering how they might change in future could allow an investor to find the…

Read more »

Brest ASX shares represented by piggy bank surrounded by autumn leaves
⏸️ Best ASX Shares

Top ASX shares to buy in March 2021

Our Foolish contributors have compiled a list of some of the ASX shares experts are saying to Buy in March.…

Read more »

rising asx share price represented by man with arms raised against blackboard featuring images of dollar notes
⏸️ Best ASX Shares

Why the Wesfarmers (ASX:WES) share price has soared 24% in a year

The Wesfarmers Ltd (ASX:WES) share price has been a solid performer over the past year. Here's why this ASX blue…

Read more »