INCHCAPE (INCH) 738.5P
A PROSPECTIVE PE of 11.3 for Inchcape, based on
J.P. Morgan Cazenove’s 65.1p earnings per share estimate for 2018, appears grudging for a multi-brand car distributor whose global diversification and scale are underappreciated. J.P. Morgan Cazenove’s 920p price target implies 25% upside for the share price over the next year.
So why are the shares cheap? Testing market conditions in certain regions are weighing on the stock. While the higher margin distribution arm is motoring, Inchcape’s retail business is challenged by new car margin pressures in the UK and Australia and a cyclical downturn in the Singapore market.
Deutsche Bank also expects flat 2018 profits in sterling from Inchcape, however it is continuing to motor in emerging markets. Inchcape has also been swept up in the souring of sentiment toward the UK domestic automotive retail sector, unfairly so given its profit bias to emerging markets.
Myriad strengths include long-established partnerships with high-end car brands, among them BMW, Aston Martin and Mercedes-Benz, and entrenched distribution in developing markets, which have combined to carve out a wide economic moat.
Earnings are diversified across five continents and revenue streams span new and used car sales, higher margin aftersales, spare parts, finance and insurance products.
A better second half of 2018, supported by easier comparatives, could act as potential re-rating catalyst, so long as growth trends in challenged markets improve.
Furthermore, a solid balance sheet and strong cash generation will enable Inchcape to capitalise on a healthy acquisitions pipeline, while continuing to fund a progressive dividend and a new £100m share buyback. (JC)