IBV Capital is an investment management firm that practices an exceptionally disciplined value investment philosophy for conservative and discerning clientele. We have a history of delivering attractive long-term rates of return, which has been accomplished by performing exhaustive analyses to identify mispriced securities and concentrating our investments in the select opportunities that provide the greatest potential to safely grow our capital.
They did an interview with Capitalize for Kids on a big stock pitch – see details below
Vertu Motors PLC was created in 2006 to acquire UK based automotive retailers. Today they operate 129 locations that provide sale, servicing, parts, and body shop facilities for new and used car and commercial vehicles.
In August, Mohnish Pabrai took part in Brown University's Value Investing Speaker Series, answering a series of questions from students. Q3 2021 hedge fund letters, conferences and more One of the topics he covered was the issue of finding cheap equities, a process the value investor has plenty of experience with. Cheap Stocks In the Read More
Today, finding attractive investment opportunities is particularly challenging. To prosper, investors must be able to adapt to evolving investment conditions – which is why those with flexible capital and a commitment to conducting exceptionally detailed investment research enjoy a distinct advantage. We owe finding and participating in a recent investment – Vertu Motors PLC – to practicing these two principles.
Looking Under the Hood
First and foremost, we look for excellent businesses. Automotive retailers exhibit numerous qualities that are consistent with a business model that compounds capital at above average rates. The most notable quality of an automotive retailer is that it’s a capital light business. The cost of building or purchasing a physical dealership is quite low and, importantly, dealers don’t pay for their new car inventory upfront. Instead, this inventory is usually financed by manufacturers at very low interest rates – only to be further subsidized through floorplan interest credits received when a car is sold.
While not obvious, high barriers to entry also exist. Market dynamics show that auto retailers compete locally, not nationally – despite reports that would imply otherwise. In fact, we often find one or two retailers control significant market share in their individual markets. This market share is further protected by their dealership agreements that prohibit competing dealerships from being built near existing facilities. This multi-faceted deterrent of competition means capital isn’t the critical factor when determining barriers to entry. It also reveals how powerful a single dealership’s market position can be. Another auto retailer misnomer is the business’ degree of cyclicality. Close inspection reveals that revenues are cyclical, but profits are typically quite stable. This is because a dealership performs three main services for customers, each with very different margins and demand tendencies: (1) selling new and used cars (2) performing aftermarket (repair and maintenance) services (3) selling financing, insurance, and warranty packages (also known as F&I).
New and used vehicle sales are most directly impacted by macro-economic health and consumer confidence, making them more cyclical. Interestingly, while they make up the lion’s share of a dealer’s revenue, they contribute only a small portion of gross profits.
Conversely, whether a vehicle is fixed by the dealer it has been purchased from, especially if it’s under warranty, isn’t nearly as dependent on the economic environment. For an auto retailer, this business contributes little to revenues, but enjoys very high margins. This explains why it represents a disproportionate share of gross profits – upwards of 40%.
The difference between revenue and gross profit contribution is even more stark for F&I. In North America, F&I makes up only a few percent of revenues, but margins are so high that nearly all this revenue falls to the bottom line. In the UK, retailers don’t break out F&I, despite the large contribution to gross margins, for fear of increased regulatory scrutiny. Therefore, the underlying impact of this segment remains hidden from the casual observer – particularly in the UK.
Our Auto Retailing Journey
Before investing in Vertu, we spent a few years following the North American auto retailer space. We began with Canada and its only publicly traded automotive retailer – AutoCanada. Since its founding, AutoCanada focused its growth in Western Canada. Unfortunately, they’ve subjected themselves to economies that are disproportionately underpinned by oil and gas industries, and a sizzling hot real estate market. Another structural challenge for AutoCanada is their inability to own specific manufacturer brands, like Ford. This is a symptom of them being public and ultimately the disproportionate influence manufacturers have on auto retailers across the country. When we combined these two dynamics with new car sales reaching all-time highs and the company’s elevated valuation, we moved on.
The retailing environment in the United States is much better. There, retailers have far more influence over the manufacturers. This is in part due to legislation, which forbids manufacturers from owning their own dealerships (in most states), as well as strong dealership contracts that make agreement terminations by manufacturers very difficult. We also found that most of the industry’s top retailers had competent management teams, sound operations, and good financial results. However, in every instance, these qualities were accompanied by premium valuations that were unattractive to us.
At this point, our attention turned to the UK and its many publicly traded auto retailers – each of which are trading at valuations that are a fraction of their North American peers and a discount to their longterm averages. While the group was attractively valued, Vertu Motors PLC, stood out to us.
The Growth Engine
Robert Forrester, Vertu’s CEO, founded the company as a cash shell in 2006. Over the next 10 years, Vertu would buy dozens of dealerships, executing its two-pronged growth strategy: buy
underperforming dealerships and turn them around or buy performing ones and bolt them onto their existing dealership platform. Today, Vertu generates £2.5 billion in sales, making it the UK’s 6th largest auto retailer.
Crash Testing a Balance Sheet
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