Car dealership group AP Eagers Ltd (ASX: APE) has zoomed ahead on the back of a record half-year net profit and it has the federal government to thank for it.
The stock surged 7.2% to $10.19 during lunch time trade after management posted a 29.5% rise in pre-tax profit to $59.5 million for the six months to end June 2015 and a 31% uplift in earnings per share (EPS) to 24.5 cents. Both figures are records for the group.
Investors also cheered the stunning one-third increase in its interim dividend to 12 cents a share, which is the highest the group has paid in its history.
I think analysts will be upgrading their forecasts for the group and I'll explain why later.
The $20,000 small business tax deduction that was introduced in the latest federal budget was a big contributor to the profit rise and 19.2% increase in revenue to $1.64 billion, along with a spike in demand for replacement parts and vehicles following the hail storm in Brisbane in November last year.
While some might be worried that growth will soften in the second half of the year as these one-off factors fall off, management thinks the momentum can be sustained due to cost improvement initiatives and earnings accretive acquisitions that it made last year like the Boettcher Group and Central Highlands Toyota.
Shareholders can also take comfort from the fact that demand for vehicles in Queensland and New South Wales is robust and more than offsets weakness for its heavy commercial vehicles.
Further, management expects the development of its technologically advanced centralised parts distribution warehouse in Queensland to pay dividends in the second half.
The outlook for the NSW's market is also strong, thanks in part to the booming property market, with the group's Newstead dealership properties expected to be completed later this year.
The result puts AP Eagers in a strong position to beat full year consensus forecast with analysts polled on Reuters tipping an EPS of 48 cents for 2015.
Group earnings are skewed towards the latter half of the year and its interim EPS is already more than half of consensus.
Coincidentally, AP Eager's peer Automotive Group Holdings Ltd (ASX: AHG) also posted a pleasing result earlier this month.
However, I think AP Eagers looks fully priced. Even with potential upgrades following its result, the stock is sitting on an estimated price-earnings multiple of around 20x.
That premium would be justified if the group can deliver more strong double-digit earnings growth for the next two years, but I have a feeling it might not have enough fuel in the tank to take it that far without more highly earnings accretive acquisitions.
