Smaller Companies: Tide turns for motor dealers

QUOTED motor dealers have had a long wait for even remotely good news, so it is not surprising that a 37 per cent improvement in new car sales in December should have had such a beneficial effect on share prices in the sector.

The recent performance of Evans Halshaw's shares, for example, is impressive but by no means exceptional. Having halved in value between the election last April and Black Wednesday in September, they have added 44 per cent in a little over two months since November.

Good news about new car sales provided the main boost, with the total number of registrations for 1992 edging ahead of the previous year's figures, ending a three-year decline.

A tendency for institutions to target second- line stocks also helped, as most companies in the sector are small by stock market standards.

Paddy Barrett, an analyst at the Birmingham stockbroker Albert E Sharp, says investors should not get carried away with figures from a traditionally very quiet month. But he thinks many motor stocks still look good value.

He warns that real recovery will not come until 1994 or even 1995, and thinks the March reporting season will provide grim reading. The tide has turned, however, because owners are realising that it makes more sense to replace than maintain ageing cars. Higher sales of new cars will help the higher-margin market for used cars and when the market scents a return to the peak earnings figures of the late 1980s the strongest companies will perform well.

Three stocks stand out. Pendragon, spun off from the conglomerate Williams in 1989, has more than doubled its franchises in the past two years and increased its exposure to Japanese makes. That puts it in a good position for when good times finally return.

Reg Vardy, the North-east-based dealer, has followed a similar strategy throughout the slump. Starting with one outlet 10 years ago, Vardy has grown to 22 sites across the full range of franchises. It has picked up dealerships at prices that will be viewed as bargain basement in a few years' time.

T Cowie also spent wisely in the lean years and picked up the leasing arm of the Royal Bank of Scotland. Because leasing companies are heavily dependent on borrowed money to finance their fleets, Cowie has been a big beneficiary of falling interest rates.

More adventurous investors could look at the sector's special situations. The Midlands dealer Quicks adopted the expansion route, but did it a couple of years early, buying dealerships just as the market was about to tip into the abyss. In better trading conditions, it could rebound nicely.

Lex Service has also had its problems. But a troubled electronics business is now off its hands and, if it can survive the loss of its profitable Volvo import concession, a wide spread of franchises around the country could serve it well.

Even more speculative are a couple of management plays where a lack of track record means buying the shares is an act of faith.

Sanderson Murray & Elder is now in the hands of former industry star Tony Bramall. He sold his previous business, CD Bramall, at the top of the market to Avis and is now buying up dealerships through his new company.

European Motor Holdings is being built up by Richard Palmer, who transformed pounds 5.5m of motor dealerships at Western Motor Holdings into a pounds 100m company in just three years.