Buckle up as car sales experience a bumpy ride

Roger Montgomery

Montgomery Investment Management

Around the world, car sales are declining. From the United States to China, car lots are suffering from increasing unsold inventory. In China, for example, automobile sales fell 13.9% in November from a year earlier, the steepest such drop in more than six years, and for 2018, car sales recorded their first annual fall in two decades, declining 6%.

But it is in Australia that declines have been the steepest. Sales in 2018 fell 3% masking an acceleration towards the end of the year with December sales down 15% compared to December 2017. Some individual brands suffered enormously over the year with Holden sales in 2018 down 32.7%, Ford down 11.6% and Mercedes down 13% for the year. And the weakness has continued in 2019 with national sales down 7.4% in January.

A bank credit squeeze, the drought, business anxiety surrounding the forthcoming federal election and a lack of wage growth all impacted sales.

But dealers don’t only make money from sales and servicing of vehicles. Car financing and insurance plays an important role in profitability and the Hayne Royal Commission’s recommendation to abolish an exemption for car retailers, from the operation of the National Consumer Credit Protection Act, may prove helpful from a market share perspective for the larger and more reputable networks.  

A closer look at three companies exposed to car sales

Automotive Holdings Group (ASX: AHG)

Weakening new car sales trends appear entrenched and the Sydney hail storms and quarantine fumigation of imported vehicles for stink bugs has delayed delivery of tens of thousands of vehicles nationwide. The company remains significantly exposed to slowing retail, deteriorating consumer and housing trends. Last year its AGM  trading update was weaker than expected, with FY2019 guidance missing already reduced consensus expectations. The bleakness however is well known and therefore probably factored into the share price.

AP Eagers (ASX: APE) 

AP Eagers is bucking the industry trend, increasing its profit guidance before tax in January by 4.5% to A$133.7 million from A$126-130 million following a record December.  Adjusting to regulatory changes and continued consumer weakness remain a concern but the company is perhaps best positioned to take advantage of any rout in the sector through consolidation.  

Autosports Group (ASX:ASG) 

According to FactSet, 2019 forecast consensus earnings per share of 13 cents is 19% weaker than 2018.  But with the share price having fallen 60% from $2.41 to 95 cents, a PE ratio of just 7.3x suggests value is emerging, provided Australia avoids materially slower economic growth. The company’s clean balance sheet should also position it well to consolidate the industry and grow by acquisition. There, however, appear to be no signs of an end to the deteriorating macroeconomic conditions and there are few positive catalysts in the near term.

3 stocks mentioned

Roger Montgomery
Founder and Chairman
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger has than three decades of experience in investing, financial markets and analysis. Roger also authored the best-selling investment book, Value.able.

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