Keep an eye on Lookers

Business ticked along nicely at Lookers during the first quarter, and bosses reckon the car dealer is on track to meet market expectations for the full-year. The shares have had a good run since October - they're up over a third to their highest since late 2007 - but management's numbers are said to be conservative and earnings upgrades could be on the cards.

Investment in the business certainly seems to be paying off. Prioritising the fleet sector has increased gross profit by 12%. Profit from new retail cars is up 4%, and higher margins meant profit from used cars jumped by 10% - better stock management, higher quality second-hand cars and upgrades to the website are behind the improvement.

Growth in aftersales - parts and services - should continue, too, thanks to the expansion of the new car market over the last three years. More customers are buying service contracts, which improves customer retention and sales growth - aftersales profit increased by 9%. Lookers also seems to be managing its finances better, with margins up across the board.

A strong balance sheet gives management room for further earnings accretive acquisitions and supports Numis Securities' forecasts of a dividend boost this year and next. Analyst Matthew Taylor expects dividend yield to rise by 40 basis points over the next two years, reaching 2.2% in 2016.

But Taylor, which has a 190p price target on the shares, reckons full-year forecasts are conservative, pencilling in sales of £3.2 billion and pre-tax profit of £67 million, giving earnings per share of 13.1p. A forward P/E ratio of 12 times is in line with auto peers, but the discount to the general retail sector has widened over the past to 30%.

We think this fails to reflect the track record of growth (PBT CAGR +29% from the trough in FY08 to FY14), the improving quality of earnings (repeat business and car parc annuity effect through Aftersales), the momentum in earnings forecasts (FY15 PBT estimates +16% over the past 12m) and Looker’s superior financial strength/ execution skills relating to bolt-on acquisitions.

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