The aura that surrounds the Connecticut-based investment manager lies in its direct historical links to Benjamin Graham, the leader of those analysts who, in the 1930s, turned equity investing from the equivalent of alchemy into something close to chemistry. In those days, Graham’s investment firm, Graham-Newman, used Tweedy & Co, as it then was, as a broker. By the 1950s it had become Tweedy Browne and had diversified into investment management, using as its template Graham’s original value-investing approach, which focused almost exclusively on a company’s tangible assets. Even now Tweedy Browne’s investing style is as close as you can get to Graham-Newman’s in the modern world.
Which brings us back to Lookers, whose profits warning last week – on top of news that the UK’s finance-industry regulator is investigating its sales practices – has left its share price shot to ribbons. At 42p, it is 63 per cent below its 12-month high and 80 per cent below the all-time peak. Almost certainly, this leaves Tweedy Browne nursing book losses on its 5.5 per cent holding. Even so, a combination of Tweedy’s presence on the share register and the share price collapse encourages the thought that there must be hidden value in the shares.
By extension, that possibility applies to pretty well all the UK’s quoted car dealers since share price performance has been, at best, indifferent for all of them and they share characteristics that appeal to investors seeking tangible assets, especially if those assets are comparatively easy to identify, to value and to realise.
That almost sums up car dealers’ balance sheets. Most important, they are crammed full of inventory; all those cars that are proving increasingly difficult to shift – especially the new ones – as UK consumers’ propensity to spend cools in inverse proportion to the country’s increasingly febrile political atmosphere. At the last count, Lookers held £1.03bn of inventory on its books, which comprised the lion’s share of its £1.31bn of current assets.
In an old-style value investor’s ideal world, the value of a company’s current assets would be greater than all of its liabilities (debt, deferred liabilities, the lot). Not just that, but current assets minus all liabilities would be greater than the market value of the company’s equity. In such a scenario, anyone buying the company’s shares would get some current assets for free and – crucially – all of the fixed assets for nothing. Back in the 1930s – and with characteristic understatement – Benjamin Graham wrote that, for any investor acquiring a portfolio of such stocks, “the results should be quite satisfactory”.
Times change and ‘bargain issues’, as Graham called them, are now a rarity. In the case of Lookers, current assets less total liabilities comes out at minus £182m – nothing for free there. However, add in the depreciated book value of its property and equipment – £351m – and at least the net tangible assets figure is slightly more than the market value of the equity – £169m against £166m. By today’s standards of value investing, that’s almost a result. For what it’s worth, it means all of the £281m of goodwill and intangible assets (59p a share) are chucked in free of charge.
Yet it’s not the best tangible-assets ratio on offer among the car dealers. That falls to Caffyns (CFYN), where net tangible assets are 177 per cent of market value. The trouble is Caffyns is the smallest of the quoted car dealers with a market capitalisation of under £12m and a lack of liquidity in its shares to match – you would be pushed to buy more than £2,000-worth of stock in one go. The ratio is also above 100 per cent at Vertu Motors (VTU), implying that among the eight quoted car dealers these three might be the best conventional value plays.
That doesn’t necessarily make them the best car-dealers’ shares to buy. It may be significant that the only dealer where current assets are more than total liabilities is Motorpoint (MOTR). Yet Motorpoint operates with a much leaner business model than the dealers locked into franchises with car makers. It sells only used cars held on low-cost sites. As a result, its inventory turnover is far higher than its franchised rivals – 9.1 times in 2018-19 against 4.7 times at Lookers – and it has growth rates to match. For example, its gross cash profits (‘Ebitda’) have compounded at 27 per cent a year in the past five years compared with just 6 per cent for the other seven dealers combined. Surprise, surprise, however, its shares are the highest rated.
There is also the question of timing. Clearly investor sentiment is pitched against car dealers, especially Lookers and Pendragon (PDG), which seems as troubled as Lookers. So to buy these stocks now is to go in the face of momentum. That may not matter to Tweedy Browne or to any investor truly taking the long-term view, especially as most of the dealers’ shares are likely to continue offering decent income. But even such patient investors should hedge their bets with mini holdings in, say, three of them – perhaps Lookers, Motorpoint and one other; take your pick from the online table whose link is below.