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Booming car sales could deliver a better second half for AP Eagers Ltd

Last month we wrote about the fall in new car sales and the subsequent profit downgrades from AP Eagers Ltd (ASX: APE) and Automotive Holdings Group Ltd (ASX: AHG).

New vehicle sales are a concern for these car dealerships because a small decline can lead to a much greater decline in profits. For example, national car sales fell 2.8% between January and April, and AP Eagers informed the market that it would see a 7% to 9% reduction in profit at the first half.

Both AP Eagers and Automotive Holdings Group shares dipped about 15% on the news. Shareholders will rejoice to hear that new car sales have picked up again this month, rising to more than 100,000 new vehicles (seasonally adjusted).

Does this mean an improvement in profit could be on the cards for the second half of the year? Maybe, maybe not. It’s important not to get too cute with the monthly data, which fluctuates even in normal economic circumstances:

source: Australian Bureau of Statistics

Importantly, the macroeconomic data (national new car sales) is not a great indicator of which businesses will succeed or fail over time. Other information such as company strategy, growth opportunities, financial position, and the skills of management also play an important role. Pundits (including me) who wondered if the decline in sales was representative of a decline in the wider economy have been stymied, at least temporarily.

However, it’s also important to note that while company-specific factors are very important, if there was a large nation-wide decline in new car sales (for whatever reason), earnings at both AP Eagers and Automotive Holdings would definitely take a dive. So it may be a sector to avoid entirely, if you’re sceptical of where the Australian economy is heading.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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