Auto related companies are getting a boost in business as recent interest rate cuts are leading to rising car sales.
The RBA decided not to drop rates in April, perhaps to avoid fanning the flames of a hot property market. Yet retail sales are beginning to show improvement in several industries. Big-ticket items requiring financing, like car sales and leasing, are some of the first to benefit.
In March, total car sales were up 8% compared to March 2014 figures, thanks to lower rates resulting in more affordable financing. The Federal Chamber of Automotive Industries (FCAI) released monthly data showing a 15% surge in sales volumes for SUVs (sports utility vehicles), followed by light and heavy commercial vehicles rising 10% each.
Passenger cars had a 2.4% rise for the month, but year-to-date are still showing some weakness.
Overall, this is a good sign for auto retailers Automotive Holdings Group Ltd (ASX: AHE) and AP Eagers Ltd (ASX: APE). Automotive Holdings Group projected better sales in the second half of financial year 2015 from lower interest rates. The company is the largest auto retailer in Australia, as well as number one in refrigerated transport and warehousing. Its interim net profit rose 17%, partly due to recent acquisitions. Automotive Holdings yields 5.2% fully franked and has a good track record for steadily raising dividends.
AP Eagers had a strong financial year 2014 with double-digit earnings growth. The company expects new car sales to increase due to vehicle damage caused by December's Brisbane hailstorm. In addition, earnings margins have been improving from used car sales and financing, giving a boost to net profits. AP Eagers owns a 19.9% stake in Automotive Holdings Group, so AP Eagers can benefit from a rise in Automotive Holdings' business and share price.
Another stock that investors should follow is McMillan Shakespeare Limited (ASX: MMS), which provides salary packaging and novated vehicle leasing for corporate and government employees. Better vehicle affordability should drive leasing and increase work volumes. Analysts forecast McMillan Shakespeare to raise earnings an average 16% annually over the next several years. The stock pays a 4.6% fully franked yield.
Of these stocks, I prefer McMillan Shakespeare because it is still recovering from a shocking share price drop in mid-2013. The company is solid, but the temporary setback makes it an attractive stock for value investors who want good growth and decent dividend income.
