The Motley Fool

Is the Automotive Holdings Group share price a buy?

Sell, sell, sell! That seems to be the current market sentiment for the Automotive Holdings Group Ltd (ASX: AHG) share price.

Automotive Holdings share price fell 59% from a 52-week high of $3.71 to close at $1.49 on Wednesday.

So is it time to buy Automotive Holdings Group shares?

The negatives:

According to Australia’s largest automotive retailer trading update, consumer confidence has been affected by the property market downturn, and this has led to crawling auto sales.

Slower auto sales will likely mean an increase in the inventory of existing stock. Thus, affecting the cost of operations and put a strain on its revenue growth.

Automotive Holdings management has also provided a lower than anticipated forecast for its FY2019 full-year operating profit of $56 million to $59 million as compared to FY2018 of $74.8 million.

Another factor that could have spooked investors into hitting the sell button on Automotive Holdings shares is the 3% fall in 2018 new car sales figures in Australia.

The positives:

Despite the gloom and doom hovering over Automotive Holdings, I think there are some notable points.

In the last 3 months, Automotive Holdings insiders have been collectively buying back shares worth a total of $353,000.

Managing director John McConnell added in last November’s trading update that other sectors of the auto market were stronger, including truck and fleet sales. I believe this could help buffer the impact of falling car sales.

Fundamentally, Automotive Holdings has an established and solid reputation that enables it to represent twenty-seven passenger vehicle brands and nice commercial vehicle and truck brands.

The group holds at least 182 automotive retail franchises at 113 dealership locations. Its refrigerated logistics division is also Australia’s largest provider of cold storage services and transport.

I believe, with its diversified nature and scale, Automotive Holdings can weather the car industry downturn.

Automotive Holdings’ share price is currently trading at a forward price to earnings (PE) of just 9 times, which is at a significant discount below its 5-year average PE of 12.6 times.

Foolish Takeaway

Based on Automotive Holdings current price to book value of about 0.65 times, I believe that it is now trading undervalue.

Similarly, a share price target of $1.82 based on consensus analysts suggests that Automotive Holdings is undervalued.

I think this could be the period where contrarian investors will start making their move to buy when others are fearful and overreacting in the market.

If you want to own Automotive Holdings shares, I think it’ll be wise to adopt a longer-term approach to capitalise on the recovery for the car industry.

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Motley Fool contributor Ivan Loh has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Automotive Holdings Group Limited. 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 Scott Phillips.

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