Wednesday, July 13, 2016

Vertu Motors

I recently purchased shares in a UK company called Vertu Motors (VTU). I have followed the company for a few years, but only after Brexit did it hit a price that had the margin of safety I was looking for.

"Vertu Motors plc is a United Kingdom-based automotive retailer. The Company is principally engaged in the sale of new cars, motorcycles and commercial vehicles and used vehicles, together with related aftersales services. It operates a nationwide chain of franchised motor dealerships offering sales, service, parts and bodyshop facilities for new and used cars and commercial vehicles. Its dealerships operate under the Bristol Street Motors, Vertu, Farnell and Macklin Motors brand names. The Company operates a network of approximately 116 sales outlets across the United Kingdom"

Their strategy is to buy troubled operations (and therefore get a good price) from unsophisticated owners, and then integrate them into their network by giving them the standardized processes that make their chain successful. They have shown a willingness to shutdown and liquidate dealerships that they can't turnaround. Returns on capital suggest the company earns its cost of capital.

Last year the company had operating income of £27.2M (previous year: £21.7M), while the company trades for just £160M. The company also had a net cash position of £24 million as of its most recent financials, much of which was used after the latest results in order to buy more dealerships.

Brexit may result in higher import tariffs for the company's cars/parts, but this company would presumably still be on a level playing field with other auto retailers in the UK. Prices may rise which would hurt demand, though. However, eventually I would expect margins to return to normal as companies adjust to the new environment. The real strategy is to sell a large number of cars without losing much money, and then to make money on repairs/servicing on a sticky customer for a number of years. I don't suspect Brexit to have a huge impact on this business model, but I could be wrong. At the current price, I think it's a good bet, however.

Because of this company's strong balance sheet, I would expect them to be able to weather any short-term bumps in the road that may come up. In the long-term this looks like an excellent prospect to me, thanks in large part to its current P/E of around 7.

Before the referendum, the shares were trading at almost 60 pence, whereas shortly after the results came out, they had fallen to as low as 37. Soon after, a couple of insiders bought shares, and the price has since stabilized (for now, anyway!) in the low 40s.

Disclosure: Author has a long position in shares of VTU.L

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