Not the end of the wheel age

Finweek English Edition - - Insight -

WHEN IT’S DARK, it’s very dark. And when the light comes back on it’s very bright. That in a nut­shell is how in­vestors feel about mono­cul­tural busi­nesses. Ex­am­ples are a gold mine that only pro­duces gold and is to­tally de­pen­dent on oth­ers for the price and de­mand for its prod­uct.

Com­bined Mo­tor Hold­ings (CMH) is also one. Or at least it’s wrongly rated as one by in­vestors. It pri­mar­ily buys and sells cars. When the de­mand for new cars col­lapsed 18 months ago CMH’s profit and share price fell equally sharply. No, ac­tu­ally much more sharply, be­cause it de­rived from a sin­gle oc­cur­rence.

For the decade to June 2007 things went well with CMH. Very well, and here at we reg­u­larly praised the qual­ity of the share. Then ve­hi­cle sales be­gan fall­ing. The mood also col­lapsed. Gen­eral Mo­tors went bust. In­vestors and con­sumers started think­ing that, like the Stone Age, it was the end of the car age or the wheel age.

CMH’s wheels also came off. Its profit nearly evap­o­rated and the proud com­pany with a proud 10-year record of in­creases had to skip its div­i­dend. Its price fell from far above 2 000c to less than 400c/share by year-end 2008.

But all of us who have to strug­gle our way through the traf­fic ev­ery day know it’s not the end of the wheel age. In Gaut­eng we al­ready have new reg­is­tra­tion plates start­ing with X, Y and now even Z.

Last week CMH an­nounced its fi­nan­cial fig­ures for the year to 28 Fe­bru­ary 2010. Op­er­at­ing profit was up by 133% to R108m. Earn­ings were up by 212% to 76c/share. Cash in the bank is R255m. It now cer­tainly no longer looks like the com­pany in­vestors thought at end-2008 was on the edge of bank­ruptcy.

In­vest­ing in the shares of a mono­cul­tural com­pany such as CMH is dif­fi­cult. Not ev­ery­one gets it right. You must at least know that W, X, Y and Z are suc­ces­sive letters of the al­pha­bet and if one fol­lows the other quickly then deal­ers are sell­ing more new cars. Mean­while, CMH’s price has climbed from be­low 400c to 1100c/share and even at that price it looks cheap.

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