What’s driving the car market? Arthur Daley would know

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New car registrations in the UK in September were the worst they had been for that month since 1999 and yet car dealers report buoyant trading.


On Wednesday, Lookers PLC (LSE:LOOK) said third-quarter trading was above expectations, “driven by new vehicle market outperformance, excellent new and used vehicle margins and continued tight cost and working capital control”.


On Thursday, Pendragon Group (LSE:PDG) PLC raised its profit guidance for the year. It said its performance in the third quarter remained strong, with the widely publicised shortfalls in new vehicles due to semiconductor shortages mitigated by higher margins and cost savings.


Motorpoint Group PLC (LSE:MOTR, OTC:MTPTF), which specialises in “nearly new vehicles”, said group revenues shot up 57% year-on-year (y-o-y) in the first half of 2021, with online sales up 53%.


The Society of Motor Manufacturers and Traders (SMMT) reported sales growth of 109% in the second quarter of 2021 compared to the same period of 2020; Motorpoint significantly outperformed this, with growth of 242%.


The SMMT said a shortage of new models forced some buyers to choose second-hand models and it seems that car dealers have responded by bumping prices up a bit.


“The strength of used car prices continues to surprise on the upside and to support motor retailer profit upgrades, despite supply constraints,” Liberum Capital Markets said, as it nudged up its target price for Lookers to 110p from 105p.


“The shortage of new cars continues to feed through to the used car market and Lookers’ LFL [like-for-like] volumes declined by 16.9% y-o-y in Q3; however, the pricing environment remains robust with high demand levels, meaning that gross margins have been very strong,” Liberum said.


Liberum prefers Lookers over Pendragon although Vertu Motors (AIM:VTU) PLC remains its top pick among the franchised dealers.


The broker also rates Motorpoint a ‘buy’, with a target price of 435p, although it has left its full-year estimates unchanged despite Motorpoint looking set to deliver record profits in the first half of the year, reflecting caution over supply constraints in the second half of the year.


The risks are “to the upside” in brokerspeak jargon.


“Management is making excellent progress with its strategic initiatives to build an agile omni-channel model that can hold its own against the online disruptors,” Liberum said.


Motorpoint shares were up 5.2% at 374p in late trading.

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