Pendragon PGD.L – Stock analysis by Bargain Value

At the end of the December, one company from our Model Portfolio has been acquired. We are talking about Pace (PIC.L). Its place has been taken by a Pendragon (PDG), which is a representative of the “General Retailers” sector. They operate as an automotive retailer company in UK and California. The company sells new and used motor vehicles. It also operates retail and service outlets for DAF commercial vehicles under the Chatfields brand name. It sells new and used motor cars, motorbikes, trucks and vans together with associated after sales activities of services, body repairs, and parts.

Purchase price (24.12.2015): 45.44 GBp

We will begin our analysis with the revenues, so let’s take a look on the chart below:

The company has generated the growing revenues during the last five years. The average growth has been 2,61% by a semester and we can expect the same, stable performance in the future. If it is maintained, we can count, that the revenues in 2015 will oscillate between £ 4228 ml  and £ 4435 ml . The other interesting fact, is the company’s results during 2006-2007. The revenues were much higher back then. However, we will see, that it didn’t have such a big impact on the net income and what is more important, the better results has been connected with the sales of fixed assets. Due to this fact, we can consider this situation, as a one time event.

 

The net income for the 2006 (£ 67,5 ml) was the best in the last 10 years. Although, the revenues was about £ 900 ml higher, than in 2015 and despite this, the net income was £ 15 ml  lower. It indicates, that the company has improved the effectiveness of its operations and has reduced the costs. Due to this fact, the company can generate better results with lower level of revenues.

The company has suffered very strongly during the financial crisis (2008). The operating came back to normal in the second half of 2009, but the net profit not before the 2011. During that time, the company was improving the operating efficiencies and reducing costs. We can see, that these practices have got an effect and bring the best performance (from the net profit point of view) in the last 10 years.

Let’s take a look on the company’s profitability:

 

We can see a crisis in 2008-2009 and the recovery of profitability indicators. During the last three years, they are growing steadily and the company proves, that is able to improve its business performance. Let’s compare this statistics with the industrial average; ROE (13.06%), ROA (5.17%). As we can see, the level of ROA for PDG is the same as for the “General Retailers” industry and the ROE is 10 p.p. higher.

The company can produce good returns for a stockholders, because it uses quite big financial leverage (DFL=1,46 in 2014). The debt level is 10 p.p. higher, than the industrial average (65.33%). The chart below presents the total debt for PDG:

 

PDG uses mostly the current liabilities and due to this fact, it is highly sensitive to harsh market conditions, when the revenues and operating profits are going down. Moreover, the current ratio is on the level of 1, which is not good and company is operating on the edge of solvency. Fortunately, the trend for this indicator is good and we believe, that in the future it will be higher and the company will not have any problem with liquidity.

Now, let’s take a look on the cash flows:

 

Back in time, we can see the period, when the company liquidated its assets (2006). During the last 5 years, the PDG cash flows are stable and characteristic for the mature enterprise. Very high, positive operating flow and lower, negative financial and investing flows. Cash is flowing to the company and paying back interests and debts.

Now, when we have knowledge about the company business and performance, let’s check its value:

As we can see, PDG is very cheap. No other words are needed. Let’s only take a look on the price chart:

The long-term trend is good, however the stock price has encountered a few slumps during the last 3 years. The January has been harsh for most stocks on LSE, even the best ones. The price’s recent, poor performance can be treated as a good time to purchase the PDG’s stocks, because the bargain can be made.

The company pays dividend. The payments are not regular and the dividend yield is not very high, but it can be a source of additional income from this investment. The table below presents the dividend features for the last 10 years:

Summary:

Pendragon Plc is the company with stable and mature business performance. It has good revenues and net profit is growing with each year. The only thing we should be aware of, it’s a very poor results during the global economy recession.