Should you buy AMA Group Ltd on today’s news?

This morning, smash repairs group AMA Group Ltd (ASX: AMA) announced the acquisition of six Accident Repair Centres for $4.7 million. The deals will be funded out of existing cash reserves at an implied earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of two times. This is low and suggests that AMA is getting excellent value for money.

Three of the centres are in New South Wales, two are in Queensland and one is in Western Australia. The company also announced its intention to open some new sites following consultation with insurance partners. The first two will be in South Australia and Victoria.

AMA has performed well in recent years on the back of its consolidation strategy. Normalised earnings-per-share (EPS) are up from 2 cents in 2012 (estimated) to 3.6 cents last year. Meanwhile the company has swung from a $12.3 million net debt position to a $22 million net cash position.

Investors should note that the 2016 normalised result quoted above adjusts for a $3.6 million expense related to an “employee equity plan”. Depending on whether this charge is one-off in nature I would question whether it should be excluded. It represents around 0.5 cent in EPS.

Based on the company’s quoted normalised EPS figure for 2016, AMA is trading on a price-to-earnings ratio (PER) of 27.5. However, EPS are likely to rise this year following today’s announcement and as the full effects of acquisitions made part way through last year kick in.

For me, AMA looks a bit too expensive at the moment, especially given the reliance on normalised figures. I would suggest that you check out The Motley Fool's Top 3 blue chips for Smart Investors instead. These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

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Motley Fool contributor Matt Brazier 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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