New Car Sales At Record Highs - Who's Doing All The Selling?
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Running a proprietary trading desk it is very important that we produce consistent returns on a monthly basis while managing drawdowns and risk. Unlike fund managers with billions under management that run a large portfolio of stocks over the long-term, our focus is significantly more immediate – we just don’t have the luxury of investing millions of dollars and waiting months or years for a return. We need to rewarded within days and weeks otherwise our funds are being wasted. So our focus is not just on finding a great opportunity but timing that great opportunity as well. And in that process we often discover hidden gems. Rarely are they actually penny stocks.
Now it seems that all the discussion that has circulated about the fundamentals of population growth in Australia and its ageing members are all fixated around the long-term housing shortage of Sydney, upward pressure on house prices and the demand on healthcare and infrastructure. There has even been regular discussion of this population growth on food and energy demand.
However, I have seen very little discussion on the impact of all this growth on new car sales and the beneficiaries this brings to dealerships. The bullish cocktail of rising property prices, population growth and record low interest rates is fueling a boom in the car industry. February and March recorded the highest ever new car sales for those respective months and the clear trend is for further records to be set.
Following on from this it’s no surprise then that auto dealership owner AP Eagers (APE) this month upgraded its market guidance for a record first-half profit to June 2015. The combination of a strong market conditions and hail storm events in Queensland has seen an increase in demand for parts, new and used cars. APE’s share price since the start of the year has gained almost 50% on the back of these factors.
Automotive Holdings Group (AHE) is the attractive opportunity for investors that is yet to enjoy the share price run of APE. By contrast AHE has only appreciated 12% this year but we struggle to see how the same set of circumstances driving APE profits higher are not benefiting AHE as well. AHE has dealerships right across the country and sell everything from Alfa’s to Ford’s to Porsche’s. In fact they cover virtually every mainstream brand on offer in the country. Record new car sales in Australia must be record sales for AHE.
To put this into perspective, we compare monthly new car sales with the share price of AHE back to 2005. Naturally it can be seen that a strong relationship exists between car sales numbers and the AHE share price. With conditions only supporting higher level of car sales this translates to a strong probability of a direct increase in AHE’s fortunes.
The second chart highlighted is a comparison of AHE with APE. Again the correlations are very close with the same market conditions benefiting both companies, however, the latest surge in APE has not been matched by AHE and here in lies the opportunity. Consider AHE sells more cars (approximately 50% more) and writes more than $1 billion a year in auto finance, we see it is only a matter of time until AHE is re-rated higher.
One of the reasons why we believe the market has not yet re-rated AHE higher is due to their logistics division. This time last year the company expanded its logistic operations into refrigerated logistics with a $115 million of Scott’s Freightways. This turned the market’s focus onto the benefits of this acquisition and the synergies it would extract which have turned out to be slightly slower than originally forecasted. But let’s put this into perspective. The refrigerated logistics division generates approximately 23% of the company’s EBITDA earnings while the automotive division contributes 68%.
The automotive division is by far the most important revenue and profit generator for the company and as already discussed the macro-economic theme and evidence is extremely bullish that is yet to be reflected.
Take into account that AHE is currently trading on a FY 2015 price earnings multiple of 15x compared with APE at 18.3x, there is definite room for multiple expansion. Investors also enjoy a healthy 5.3% fully franked dividend as well.
All of this combined suggests that AHE is poised for a significant re-rating higher through its 2007 and 2013 high across $4.37/4.43. The past two years has seen AHE build a healthy tight consolidation which provides a strong platform from which to establish the next major uptrend – similar to that of 2012. It is also identical to the technical formations that appeared in stocks like iiNet, M2 Telecommunications, Retail Food Group, Slater and Gordon before their massive multi-year price rallies.
Given that such setups of a great technical formation, a strong supportive macro theme, an underlying earnings growth story, solid dividend and importantly attractively priced are difficult to come-by, we think Automotive Holdings Group is an extremely attractive opportunity that is on the brink of rewarding shareholders in a major way – just like it’s peer.
Greg is the Head of Proprietary Trading at Global Prime and has over 20 years of experience as proprietary trader and high level strategist for the major investment banks including Citigroup, Bankers Trust and Macquarie Bank. He has been involved across all asset classes including commodities, bonds, currencies and equities right across the globe.
After a 10-year career within the comforts of the large investment banks and research firms he branched out on his own to form his own proprietary trading firm successfully building the business into a multi-million dollar trading operation that turned over a billion dollars a year. This same team now runs the proprietary trading desk at Global Prime, risking their own money in line with the firm's and client's capital.
Greg has appeared on CNBC, Channel 9 - Business Sunday programme, a guest columnist for the Australian Financial Review, a regular author for Personal Investor, Wealth Creator and Shares magazine and is the former Treasurer of the Australian Technical Analysts Association.