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Supercharge your portfolio with this automotive stock

Investors everywhere are scurrying into companies that stand to benefit from improving consumer confidence, business confidence, and a generally stronger Australian economy led by increased infrastructure spending. This theme has seen building products companies, some retailers, banks, gambling companies and various other industrials all perform extremely well over the last 12 months.

Online-only companies have also been popular, the hotel and flight aggregator companies have performed well, as have sites that advertise cars and holidays, however I feel that companies exposed to new car sales and increased cross-country freight have been somewhat left behind.

It seems logical to me that if Australians are feeling confident about their investments and income, then the first few big ticket items to be bought are holidays, home furnishings, and new cars. A key requirement for the last two is a pickup in road, rail, and to a lesser degree, seaborne freight transport.

Listed companies with exposure to holidays are many and look expensive, while the few listed companies with exposure to new car sales and logistics have been left behind by some of the more fashionable companies out there.

There is one company however, that I believe stands out from the others as having a huge potential to grow. That company is Automotive Group Holdings Ltd (ASX: AHE).

AHE has hit the headlines in recent weeks due to a big acquisition of Scott’s Refrigerated Freightways and the Bradstreet Motor Group for a combined $184 million. Before the acquisition, AHE has been known as a car and truck dealership owner and logistics group. The company has 150 dealerships around Australia and New Zealand, while the logistics division has a strong focus on automotive parts distribution.

Following the purchases, AHE will be the largest cold transport and storage provider in Australia, with scale to continue to boost earnings in coming years. AHE will also end up with around 170 car and truck dealerships in what is an extremely fragmented market. It therefore has room to grow.

Importantly, the two purchased businesses generate higher margins than AHE currently, and earnings will be immediately boosted. Once finalised, brokers estimate that AHE will have net debt of 17.1% of assets and around $70 million of bank facilities available for further acquisitions.

Foolish takeaway

Should AHE execute the purchase and integration of the new companies well, earnings are expected to grow by more than 20% from 2015 onwards, which should result in a solid share price boost. As always, there are risks and AHE isn’t for the feint hearted as the company has a history of poor acquisitions. I believe, along with many analysts it seems, that this latest acquisition will be the start of a great new chapter for the company.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned

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