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3 companies that will gain from higher car sales

August new car registrations data from the Australian Bureau of Statistics (ABS) showed a 0.8% seasonally adjusted rise from the July figures. This is returning to the previous monthly uptrend after July data showed a 3.5% dropped compared to June figures.

Part of the drop and then sudden recovery is likely due to the uncertainty surrounding the Federal election and the proposed fringe benefit tax (FBT) changes.

New car sales statistics show the strength or weakness of the economy because a new car is a discretionary purchase and a significant one for most people. You would only buy a new car when you feel you have the extra money to cover the payments. More car sales means more buyers with that economic sentiment.

McMillan Shakespeare (ASX: MMS) will benefit from better car sales because it provides salary packaging services that include financing for vehicle leases, and with a Liberal government, the proposed legislation will never see the light of day now. For 2013, its annual revenue and net profit were both at all-time highs. If leasing agreements for the rest of the current financial year are strong, the final result may be enough to offset any initial weakness from the two months just before the election.

Car dealership operator AP Eagers (ASX: APE) made an announcement in July that it expected no material change from the proposed FBT legislation since the great majority of its business is in sales. Its share price was already correcting down to around $4 before the proposal, and has rallied back up since then.

It raised its profits all the way through the GFC fears from 2008, so if it can thrive during hard times, then it has a much better chance of successful car sales in a strong market. In addition, in mid- 2012, it also bought a 16.3% stake in Automotive Holdings Group (ASX: AHE), itself a vehicle dealership group operator and logistics service provider.

Automotive Holdings Group has been similarly successful in growing revenue over the past two years, with about 70% coming from auto retail. It has 130 dealerships domestically and in New Zealand.

Foolish takeaway

Although all three should be beneficiaries of a strong upturn in auto sales, the best of the three from an investor’s point of view is McMillan Shakespeare. The two car dealership operators both have return of equity ratios over 10%, but their net profit margins are between 1.5% and 2.1%.

McMillan Shakespeare has a 31.8% return on equity and 18.99% net profit margin, so your investment could have more earning power. The recent share price drop from $18.00 to $8.00 because of the legislative proposal was a good opportunity to get in to a good company at a very affordable price.

That’s a natural margin of safety built into your purchase price, and it has recovered to about $11.40.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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