Not the end of the wheel age
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.