Can Vertu Motors double?

Alongside housebuilders and the finance sector, car dealers suffered a major dent in confidence in the aftermath of the EU referendum vote. They're still shy of pre-Brexit levels, but many have recovered a significant portion of their losses. Vertu Motors hasn't. Is this underperformance justified, or is the market missing a trick?

Vertu was one of the stocks tipped to triumph after a widely-anticipated 'Remain' vote. Instead, they plunged 36%, investors fearing an inevitable recession would ruin a highly cyclical industry as it did in 2007/08.

Even before Brexit, Panmure Gordon analyst Michael Donnelly worried, and with some justification, about Vertu's "overdependence on short-term financing and potentially softening macro indicators". He slashed his price target by 30% to 60p.

But both of Vertu's post-referendum updates have been positive. Much like the wider economy, the threat of impending Brexit has had little visible impact. The company said on Thursday:

"The result of the referendum to leave the European Union has, to date, not impacted consumer confidence as adversely as some were initially predicting and the group has not experienced any significant change in consumer behaviour."

At the AGM six weeks ago, Vertu said profit in the four months to 30 June was up on last year and that full-year results would match forecasts. Total revenues was up 21.5% and by 8.4% on a like-for-like basis. Now, we're told that trading since has been "robust" and better than the year before.

Data from industry body The Society of Motor Manufacturers & Traders (SMMT) reveals car sales in decline, and Vertu admits this is likely to continue. But, crucially, Vertu makes most of its money on aftersales and used cars, which have kept growing.

Expect annual results "in line with market expectations with record revenues and profits," it says. Tom Gadsby and Adam Tomlinson at house broker Liberum pencil in £19 million of underlying pre-tax profit for the first half to 31 August. Expect confirmation on 12 October. Last year, profit rose 28 % to £17 million. That gives a full-year estimate of £31.4 million profit, up 15%.

"We leave our own FY forecasts unchanged but today's update reinforces our confidence in the full year outlook," they write.

Record low interest rates and high employment certainly help the car industry, although the weak pound does "create uncertainty around future manufacturer strategies towards new car pricing".

Still, Vertu shares trade on a miserly seven times Liberum's bullish earnings per share forecasts for 2017 with a dividend yield of 2.9%. Even on less optimistic estimates, it's still only eight times forward earnings, less than larger peers Pendragon, Lookers and the mighty Inchcape, which Vertu has underperformed significantly since 24 June.

"We believe that the shares, down 58% year to date, are oversold," says Liberum, which maintains its 'buy' rating and 100p price target.

"The company is well-placed to benefit both from established dealerships and from its long term strategy of acquiring and turning around under-performing dealerships."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.