Just over two weeks ago, Inchcape, the car sales and dealership group, released an unexpected business update. Having told shareholders in April that earnings would be around £300m by 2022, chief executive Duncan Tait said the group is now likely to do much better than that.
With sales and margins moving at a brisk pace and order books at record levels, Tait suggested full-year profit would be closer to £370m, an increase of 54% on previous figures. 2021 underlying.
The news came as a surprise to City analysts, who quickly upgraded their forecasts for the company. But perhaps it was even more shocking for the market in general. After all, the prevailing wisdom is that the auto industry is struggling, as sales fall and supply chains falter.
Sales Boost: Inchcape has over 100 dealerships in the UK, but more overseas, including Australia and the Caribbean.
Inchcape’s current performance indicates that the theory may be wrong. It operates just over 100 dealerships in the UK, selling around 80,000 cars a year, from top brands like Mercedes, Porsche and Jaguar to vehicles like Toyota and Volkswagen.
Electric and hybrid vehicles are added to the mix, with a good number of used cars as well. The deal helps Inchcape form close ties with the big automakers, but it’s a small beer from a profit perspective.
Inchcape makes the vast majority of its money offshore, operating in 40 countries around the world, from large developed economies like Australia and New Zealand to small Pacific islands like Guam. The firm also works in a number of Latin American, African and Caribbean states, as well as many smaller European countries, from Romania and Bulgaria to Belgium and Luxembourg.
In these regions, Inchcape acts as a distributor and not just a distributor. That means the company does just about everything for automakers besides making their vehicles. They bring cars from the factory gate, set up clever marketing strategies, sell the cars, and also take care of service and repairs.
The markets in which Inchcape operates vary greatly but share certain characteristics. Consumers want to be able to buy cars easily and cost-effectively, and automakers want to work with companies they can trust. Inchcape ticks both boxes.
The company has long had a reputation for reliability and integrity, qualities that automakers really look for, especially the more luxurious brands, where reputation is paramount.
With Tait, however, Inchcape has taken a big step into the digital world, so that would-be car owners can do almost everything online, including personalizing vehicles and obtaining financing. Some places will even deliver new cars to doorsteps so motorists don’t have to set foot in a showroom.
The digital push makes sense. More than 90 percent of consumers around the world start their car search online. Tait and his team are concerned with putting the automakers they work for near the top of the heap. The group is also investing heavily so that consumers can find what they need once their search gets serious.
Inchcape also does all sorts of smart analytics so you can determine which cars are most likely to appeal to certain markets and how best to make the buying process as smooth as possible.
All of these tactics are really paying off. In Chile, for example, Inchcape recently took over a dealership that sold 400 Volvos a year. This year, more than 4,000 are expected to be sold.
This is the kind of growth that Tait is looking for. Around 90 million cars are sold each year, of which 17 million are sold by independent dealers.
Inchcape is the largest of the breed, but has just over 1 percent of the market, a percentage that Tait intends to increase organically and by acquiring smaller distributors, many of whom find it difficult to keep up with the demands of the majors. automotive firms.
The group is also interested in upping its game in the used car market, and Tait is making a determined push into the electric vehicle sector, even in countries where charging networks are relatively underdeveloped.
The challenges remain. Earlier this year, Inchcape moved out of Russia and sold its highly profitable Russian business to management. Looking ahead, there may be dips here and there, if economic pressures become deeper and more widespread.
However, Inchcape is strong and cash generating, operating in places where car ownership is a real aspiration because it can transform lives and livelihoods.
As such, brokers expect sustained sales and earnings growth over the next few years, accompanied by rising dividends: 27.55 pence by 2022, 28.9 pence next year and nearly 33 pence in 2024.
Midas Verdict: Earlier this year Inchcape shares were trading at £9.40. Today it is £6.91, even after the recent earnings update. The slide reflects broader market concerns about economic growth, but does not reflect Inchcape’s long-term prospects or proven resilience over many years. The stock is a purchase, and the dividend also provides an income boost.
Traded in: main market Heart: INCH Contact: inchcape.com or 020 7546 0022