Eagers Automotive shares sink after weak trading update

Eagers Automotive (ASX: APE) shares have sunk by 16% over the past month and 30% year-to-date to $10.13, as the motor vehicle dealership business posted a difficult trading update last week. For context, the stock as last changing hands at this price point in July 2022.

While the fall may reflect a weaker macroenvironment, the stock has recovered some of its deepest losses — as arguably, the weakness is a near-term phenomenon.

Eagers Automotive shares: trading update

In the update, the company noted that while revenue had grown by some 18.3% year-over-year in calendar 2024 to April, it also noted that it expects ‘an underlying trading performance for the first half of 2024 that is approximately 85% of the underlying profit before tax for the first half of 2023.’

However, rather than internal problems, the company blamed multiple macroeconomic factors — including the cost-of-living crisis impacting on retail consumer spending, inflation increasing the expense of doing business, the increasingly competitive marketplace, and the current expectation that Australia is now at the top of interest rate cycle.

CEO Keith Thornton, seeking to allay concerns, noted that the company ‘continues to be focused on what we can control rather than obsessing over external economic or market conditions. As a 110-year-old company we are acutely aware we will experience economic cycles, both good and challenging.’

However, the CEO also noted that the new car market remains on track for another record year with Eager’s order bank continuing to be delivered, supporting both revenue and margins.

Where next for Eagers Automotive shares?

The good news is that there is some legislative support, with the Federal government extending the Instant Asset Write Off in the 2024 budget. This allows companies to enjoy an immediate deduction for the business portion of the cost of an asset in the year the asset is first used or installed ready for use — which could support new car sales.

Further, the rollout of Australia's New Vehicle Emission Standard at the start of next year could also be a tailwind. Then there’s the recently announced ‘Future Made In Australia’ policy, which could indirectly boost the production and sales of electric vehicles.

And Thornton did note that despite the current cyclical weakness, ‘we remain on track to exceed our revenue growth ambition in 2024 and will continue to be relentless in the execution of our business transformation strategy, while using discipline to review increasing opportunities for accretive M&A activities.’

In a vote of confidence, non-executive director Nicholas Politis added to his already substantial holding, buying up 200,000 shares in on-market trades during the dip at an average of circa $10.45 — or roughly $2.1 million of shares.

Interestingly, at least one broker sees the recent weakness as a potential opportunity. Bell Potter has reiterated its ‘buy’ rating with a $13.35 price target, noting that the dividend could rise to as much as 73 cents per share in FY25. Meanwhile, Jefferies has increased its rating to ‘hold’ with a $10.40 price target.

It’s perhaps fair to take the CEO at his word. The company is exposed to cyclical macroeconomic factors outside of its control, but that given the relatively stable nature of the business, it’s well set up for the next upturn. And while annual CPI inflation increased to 3.6% in April, it’s still worth noting that quarterly inflation has fallen significantly since its peak.

The company may be set to recover should the upturn arrive.

Past performance is not an indicator of future returns.

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