Vertu Motors (VTU): Reports Half-Year Earnings; Stock Still Seems Cheap
Vertu Motors (“VTU” in London) reported its interim results. As a U.K. stock, the company reports results twice a year. This is their half-year report.
Accounts I manage hold shares of Vertu Motors.
Tangible Book Value
As I write this, Vertu’s share price is about 45 pence. Net tangible assets per share are 71 pence. So, the stock is trading at 0.63 times tangible book value.
Tangible assets are mostly made up of…
Inventories: 49% of gross tangible assets
Property, plant, and equipment: 26%
Cash: 9%
Receivables: 7%
Payables mostly offset the combination of inventories and receivables. There is some debt. So, the net portion of tangible assets is largely the result of land, buildings, etc. and cash minus debt.
Earnings Per Share
Earnings come from…
Parts and services: 40% of gross profits
Used cars: 30%
New cars: 20%
Fleet and commercial vehicles: 9%
Earnings per share for the six months ending August 31st, 2022 were 6 pence a share. As I write this, Vertu’s share price is about 45 pence. So, the stock price is about 7-8 times earnings per share over the last six months.
Last year’s full year earnings per share (this year will be lower) was 17 pence. So, the stock trades at about 2-3 times last year’s record earnings per share.
Annual earnings per share in each of the 5 years before COVID were 5-6 pence a share. So, the stock price is about 7-9 times average pre-COVID earnings per share.
Over the last 15 years, Vertu’s average return on equity has been about 8-9% a year. Applying this rate of return to the current balance sheet’s 71 pence per share in tangible book value would suggest earning power of 6 pence a share (71 pence * 0.085 = 6 pence).
Since:
- Earnings per share were about 6 pence over the first 6 months of this year
- An 8-9% return on equity applied to the current 71 pence in net tangible assets per share would be earnings of 6 pence a share, and
- Vertu averaged earnings per share of about 6 pence a share in the years right before COVID…
It seems reasonable to assume that the company’s average future “earning power” is not less than about 6 pence per share.
The stock is trading right now at 45 pence a share. So, it seems to be trading at less than 8 times its “earning power” and about two-thirds of its tangible book value.
As a result, Vertu continues to qualify as a value stock.
The company’s guidance suggests higher costs in the near future and that “full year profits will be ahead of market expectations”.
Share Buybacks
Vertu bought back just under 3% of share outstanding during the first 6 months of the year. The company will probably continue to buy back some stock this year.
Dividend
Vertu’s interim dividend was raised from 0.65 pence to 0.70 pence. Last year’s final dividend was 1.05 pence. Assuming the final dividend is kept at that level, the stock’s current dividend yield would be just under 4% (0.70 + 1.05 = 1.75; 1.75 / 45 = 3.9%).
Price and Value Creation / Destruction
The combination of a dividend yield of almost 4%, P/E below 8, and price-to-tangible book around two-thirds makes Vertu a low-priced stock.
The two main uses of earnings – paying a dividend and buying back stock below tangible book value – suggest earnings shouldn’t be worth less here than at other public companies. Right now: value is not being destroyed. In fact, the share buybacks might even be creating some value. The dividends are a neutral factor.
As always, there is probably concern among investors that Vertu will issue shares below book value to acquire dealerships at a price above book value. Given the company’s current cash position and its stated willingness to go no higher than 1.5 times Debt/EBITDA – this is a realistic concern only if Vertu makes a very big acquisition.
Of course, given the company’s low price-to-tangible book ratio relative to the ratio paid in control acquisitions of dealer groups – it would be very hard for Vertu to make a big acquisition that didn’t destroy value unless the company just used 100% cash and debt instead of its own shares as part of the payment mix.
The fact that Vertu trades well below tangible book value, has a history of making acquisitions, and is eager to do more (“strong acquisition pipeline in place”) means this is a constant concern for shareholders.
The company’s recent behavior has included buying back a decent amount of stock and has not included acquisitions financed with undervalued shares. But, in the more distant past, Vertu definitely did do this a couple times. And those decisions did have a major impact on shareholder returns over the company’s entire history as a public company. So, there’s always a question of whether the long-term record of capital allocation or the more recent record of capital allocation is the better guide to the future here.