Rising living costs are forcing consumers to tighten their belts.
According to the Australian Bureau of Statistics, spending on discretionary goods and services rose only by 0.6% in April 2024, while non-discretionary spending rose by 5.8%.
Amid this backdrop, it's not surprising that the automobile dealership sector faces significant challenges. Many potential buyers are delaying vehicle purchases, raising questions about the current value of retail stocks in this industry.
This bleak industry outlook has driven Peter Warren Automotive Holdings Ltd (ASX: PWR) to a five-year low in its share price.
This consumer discretionary stock is trading at a price-to-earnings (P/E) ratio of below 8 times and offers an 11% dividend yield. Is this the right time to buy Peter Warren shares, or is it merely a value trap?
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Automotive dealership business
Peter Warren is an automotive dealership group with a rich heritage, having operated in Australia for over 60 years. The company runs 85 franchise operations and represents 27 brands across volume, prestige, and luxury segments.
Peter Warren operates along the eastern seaboard under various banners, including Peter Warren Automotive, Mercedes-Benz North Shore, Macarthur Automotive, Penfold Motor Group, Bathurst Toyota, Volkswagen, and Euro Collision Centre.
Understandably, it is not an easy time to run any consumer discretionary business, let alone auto dealerships.
In 1H FY24, the company reported a 1% growth in its underlying earnings before interest, tax, depreciation, and amortisation (EBITDA). Its underlying profit before tax was down 20% to $34.4 million as the higher interest rates weighed on.
The share price has halved over the past five years, reducing the company's market value by approximately $300 million.
Profit guidance downgrades
The weak profits and rising debt costs led the company to downgrade its FY24 profit guidance.
As indicated in its May update, the company anticipates an underlying profit before tax of $52 million to $57 million for FY24, which is below market expectations.
The business is hit by weak customer demand and intensifying competition. The company noted:
A significant increase in vehicle supply by OEM's has led to greater competition between dealerships and lower gross profit margins on new vehicles. The contraction in new vehicle margins has occurred across the industry and is the most acute in brands and models where supply levels and inventory holdings are highest.
The level of customer demand for new vehicles has reduced as a result of cost-of-living pressures.
Are Peter Warren shares cheap enough?
At such a low share price, Peter Warren shares appear undervalued based on many valuation metrics. Using estimates compiled by S&P Capital IQ, Peter Warren shares are currently trading at:
- 8 times FY24 earnings estimates
- 9 times FY25 earnings estimates
- 0.6 times its book value
- fully-franked dividend yield of 11%
However, the higher P/E ratios for FY25 imply analysts' forecast earnings will continue falling in the coming years.
While it's difficult to argue that these numbers are expensive, whether they are cheap enough will depend on when the earnings will reach their bottom from here.
Is it time to buy Peter Warren?
Peter Warren shares look cheap using many commonly used valuation metrics, although it is difficult to pinpoint when exactly consumers will return to buy more cars.
