The Automotive Holdings Group Ltd (ASX: AHG) share price has experienced a tumultuous 12 months after hitting all-time highs of $5 per share last August, to now trade near multi-year lows (based on Monday's close of $3.02).
The latest plunge in share price of Australia's largest listed automotive retailer comes after management updated the market with a profit downgrade, just one day after listed peer AP Eagers Ltd (ASX: APE) did the same thing.
AHG's shares were crunched over 10% on the day of the downgrade and are currently down over 15% from a month ago.
Accordingly, with AHG's share price appearing to finally find a floor, I think it's time to take a closer look.
Industry slowdown
The underlying cause of AHG's and AP Eagers' profit downgrade was the fact that the car retailing industry is experiencing a cyclical blip in demand. Based on IBISworld estimates, the circa $64 billion Australian automotive retail industry is slated to decline 0.5% annually from 2017 through to 2022.
The key driver behind this slowdown is a projected decrease to real household discretionary income as house prices soar, interest rates rise, and income growth stagnates. This makes it harder for consumers to splash out on discretionary purchases like new cars.
Whilst these demand-side economics are partially expected to be offset by newer technology (making cars cheaper), the uptick in oil prices and corresponding fall in the Australian dollar have made motor vehicles slightly more expensive than they were a mere two years ago. This accounts for the overall slowdown in the industry as consumers defer purchasing new cars ahead of other obligations.
Silver lining
Obviously a slowing industry can make for a bad investment if organic growth prospects are muted.
Ordinarily, this would be the case for AHG given the declining growth rates in the industry. However, in my opinion, the silver lining lies in the current structure of the automotive retail landscape in Australia.
According to IBISworld data, the Australian motor vehicle dealers industry is fragmented with the largest player – AHG – holding a mere 7.1% market share. Peers AP Eagers and lesser-known operators Sutton Motors and Patterson Cheney hold approximately 4.9%, 1.8%, and 1% respectively.
The fact that the top four players of the car industry collectively command less than 15% market share is in stark contrast to the big 4 banking oligopoly of Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Banking Group Ltd (ASX: NAB) and Westpac Banking Corporation (ASX: WBC), which collectively accounts for a whopping 70% of Australia's banking industry. Accordingly, this makes the industry primed for consolidation.
In my opinion, AHG is best placed to capitalise on its market-leading position in the sector.
Balance sheet
Although management's recent trading update implies a slowdown to AHG's record growth rate and a decline to profitability for the current year, the fact of the matter is that the entire industry is feeling the pain. This means distressed asset sales could come onto the market if the trend worsens.
Given AHG's secondary refrigerated logistics business remains in robust shape, I believe AHG is best placed to weather any short-term downtrend and flex its balance sheet muscle to build a stranglehold across Australia's retail automotive market if/when required.
Foolish takeaway
Whilst profit downgrades are often cause for concern, I believe AHG's current track record and acquisitive growth prospects should make for a smooth ride from here on out.
Although the company may continue to be hit by weak consumer sentiment, the fact that it trades on a trailing price-earnings of 12x and offers a fully-franked yield of 7.33% (if dividends are maintained) makes a compelling investment case in my opinion.
