Economic prospects for much of the developed world remain unclear, but the long-term growth story for emerging markets remains intact, and UK listed companies which can tap into this should benefit. These include car distributor and dealer Inchcape, which operates in 26 mature and emerging markets around the world. Margaret Lawson, co-manager of SVM UK Growth Fund, explains why this stock has potential.
"With approximately two thirds of Inchcape's profits generated outside of Europe, the company is well exposed to continued strong demand in emerging markets for premium automobiles," she says. "The Russian car market, which suffered markedly towards the end of the last decade, has been particularly buoyant with double digit sales growth. Promisingly, even the domestic UK market, which accounts for almost a quarter of operating profit, has seen revenues grow ahead of expectations in the year to date.
"In larger countries such as the UK and Russia, the company operates large retail sites for a variety of manufacturers. In smaller countries such as Singapore and Hong Kong, Inchcape acts as a distributor for a wide range of marques including Toyota, Lexus and Subaru.
"While the automobile sector has been buffeted by a number of headwinds in recent years ranging from the global financial crisis to the sizeable impact of the Japanese earthquake in 2011, Inchcape's performance has been remarkably resilient. Strong cash generation now means that the company has a net cash position of close to £200m on its balance sheet. This should give the company firepower of approximately £500m to make bolt-on purchases or, in the absence of any suitable targets, return cash to shareholders.
"Currently trading on an estimated 2012 price earnings ratio (PE) of around 9x and offering a dividend yield of over 3 per cent, we believe that the market has not fully recognised the growth opportunities available to Inchcape. With strong earnings momentum and the ability to utilise its cash balance, the stock is well positioned to outperform."
