Why Pendragon shares just surged 18%

Pendragon's profits warning on Monday was another worrying sign for a car industry hit by an oversupply of vehicles and faltering consumer confidence. It sent shares in the dealerships business - best known for its Evans Halshaw and Stratstone forecourts - crashing as much as 28%. But is the sell-off overdone?

Long-time chief executive Trevor Finn admitted that profits this year will be closer to £60 million than the £75 million promised. An interim profit of £48 million implies Pendragon will make just £12 million in the second half.

However, he also said that profits growth will return next year, a pledge he has now backed up by shelling out £445,000 on shares in his own company.

His personal vote of confidence in the outlook soothed fears of investors and helped jump-start the company's ailing share price, which today rallied up to 17% or 3.75p to 26p. It had fallen as a low as 20.69p yesterday.

Finn's purchase was accompanied by the acquisition of £117,249 of shares by new chairman Chris Chambers, a non-executive director since January 2013 who has taken over with immediate effect from Mel Egglenton.

Finn picked his 2 million shares up for just 22.25p each and Chambers his 510,000 shares at a whisker under 23p. At a current price of 25p, the boss is sitting on a paper profit of £55,000 and the new chair over £10,000.

The purchases were made the day after the company issued its profits warning, amid declining demand for new cars and a knock-on impact for the price of used vehicles.

With UK market car registrations down by 8.9% in the third quarter, Pendragon said its predicament was not helped by certain manufacturers continuing to force vehicles into the market despite softening demand.

Pendragon said: "During the quarter as consumer confidence waned we experienced significant market pressures."

It expects the new car market to continue to decline this year and the first half of next year as manufacturers adjust to the reduced level of demand for new cars.

However, used car volumes are expected to continue to grow and Pendragon is still looking to double revenues from this sector in the five years to 2021. The company also benefits from the resilience of its aftersales business, which is the group's largest profit contributor.

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