Car sales website AutoTrader (AUTO) has defied the woes of the automotive industry, posting a rise in profits and revenue in its annual results.
The upbeat results contrast sharply with the figures coming out of the industry in recent months, most recently that new car registrations were down 4.6% year-on-year in May, the 26th consecutive month of falls.
AutoTrader chief executive Trevor Mather said that despite the wider market uncertainty the firm is confident of meeting its growth forecasts for the current financial year. AutoTrader's net profits climbed 15% to £242 million and revenues rose 8% to £355 million.
AutoTrader is also conrfident that Brexit will not affect the business, though it did acknowledge the problems facing the wider UK economy: “We do not foresee any issues with Brexit affecting our ability to provide our services, or to materially change our cost base.”
It added: "[But] due to the challenges facing manufacturers and their agencies, we expect revenue from these customers to decline in the first half of the year.”
As well as providing a forum for private car buyers to sell between themselves, car dealerships also use AutoTrader to promote new cars.
While Auto Trader expects new car sales will be down in this financial year, the used car market in Britain is faring better, according to figures from industry body SMMT.
SMMT new car registration figures show a near 20% drop in registrations of diesel cars, but petrol and alternative fuel vehicles (AFV) – hybrids, plug-in hybrids and electric cars – sales have ticked up. Alex Buttle, director of car selling comparison website Motorway.co.uk says the Government’s decision to cut hybrid and electric car grants last year looks “baffling”.
“Electric is the future, but AFV market growth is vulnerable in the short term and in danger of grinding to a halt. Aside from environmental concerns and efficient running costs, consumers have little incentive to buy electric at the moment, particularly with Brexit hammering consumer confidence,” he said.
He argues that buyers are sticking with their current vehicles rather than upgrading until Brexit uncertainty dissipates.
European Car Industry in Crisis
The European car industry has struggled for years with over-capacity, falling sales, cost pressures and scandals over diesel emissions, which damaged the reputation of big names such as VW (VOW). With European governments forcing a shift to electric vehicles – the UK will make no petrol or diesel cars from 2040 – costs have rocketed for manufacturers while AFV vehicles have yet to go mainstream.
With the UK one of Europe’s biggest export markets for cars, the industry has lobbied for special terms during the Brexit negotiations – the Prime Minister’s now defunct Chequers deal would have provided tariff-free access for EU cars under a customs union for goods.
Manufacturers have already started making contingency plans for a slowdown ahead of Brexit: Jaguar Land Rover is to cut 1,000 jobs over two years and Ford will close its Bridgend plant in Wales by September next year.
There was a brief spark of M&A interest in recent weeks with Fiat Chrysler (FCA) making an approach for French carmaker Renault (RNO). But the potential deal has now fallen through and Renault shares are off 7% in trading today. Renault is owned by a number of investors, including the French government and Japan’s Nissan. Fiat Chrysler, itself a product of a merger of Italy’s Fiat and America’s Chrysler, blamed “political conditions” for the collapse of the deal. France’s finance minister said gaining the support of Nissan had proved one of the major stumbling blocks for the deal. French politicians were demanding guarantees over jobs and production to approve the deal.
Undervalued Car Stocks
Fiat Chrysler and Renault are rated as a five-star stocks by Morningstar analyst Richard Hilgert, which means they are significantly undervalued: Fiat’s fair value estimate is €28, compared with a current price of just below €12, and Renault is trading at almost half its fair value of €90 at around €50.
“We view the combination of these two companies as reasonable given global competition, high capital intensity, and industry disruption,” says Hilgert. He believes a Fiat-Renault combination would lead to cost savings in research and development as well as manufacturing because the two companies have similar models targeting the mid-range urban market.
Hilgert argues that Fiat Chrysler’s valuation has been “aggressively punished” by the market due to uncertainty over management’s five-year plan to raise revenues. He adds that the company should continue to do well in emerging markets, especially in Brazil, where it will benefit from the rise of the middle class.
Among European carmakers, Hilger favours Germany’s BMW (BMW): “BMW continues to outperform the overall car market despite global economic uncertainties and is one of only a handful of automakers to which we assign an economic moat [or competitive advantage]”.
“BMW has been able to consistently produce vehicles that command superior pricing as well as margins and to generate revenue increases above global vehicle growth rates,” he adds.
