2 dirt-cheap value and income stocks I’d buy in 2018

UK car dealers are some of the most hated companies on the market at the moment because the industry is facing a highly uncertain outlook. 

Indeed, over the past three months, shares in leading industry groups Pendragon (LSE: PDG) and Marshall Motor (LSE: MMH) have declined by around 10%, as new car sales have slumped. 

However, despite the dour market sentiment, the underlying businesses seem to be holding up relatively well. Today, Marshall Motor reported that during the first half of 2017, the group outperformed the UK market reporting a marginal 0.4% decline in like-for-like unit sales to retail customers against the overall UK new car market average decline of 4.8%. 

During the second half the company also reportedly “maintained its outperformance of the market” but no specific figures have been given. In the second half, overall total new vehicle registrations to retail customers decreased by 9.2%.

Still, as new car sales come under pressure, the firm is making impressive progress in the used car and aftersales markets. Used car sales expanded 5.8% in the first half and aftersales expanded by 2.3% for the year. 

Mixed outlook 

2017 was a bad year for the UK car industry, and 2018 is not expected to be much better with forecasts suggesting that new car registrations will decline by 5.4% due to political and economic uncertainty. Nonetheless, Marshall’s management is optimistic about the future based on the firm’s market-beating performance during 2017. What’s more, the group has a healthy balance sheet. The disposal of its leasing business during the second half has “effectively eliminated” total net debt of £101m reported at the end of June. 

Overall, Marshall is outperforming in a harsh environment and right now, the shares are very cheap. At the time of writing they are trading at a forward P/E of just 6.1, a valuation that seems to suggest the market expects this business to go bust in the near future. As well as this lowly valuation, the shares also support a dividend yield of 3.8%, which is unlikely to be cut anytime soon as it’s covered four times by earnings per share. 

The market has given Marshall’s peer, Pendragon a slightly higher valuation, but the business’s multiple still suggests that the market has written off the company. 

Too cheap to pass up? 

Pendragon currently trades at a forward P/E of 8.6 and yields 5.2%. Earnings per share are projected to drop by 19% for full-year 2017, which is disappointing, but management is taking steps to steady the ship. 

Advisors have been appointed to dispose of the group’s US business, which is expected to go for around £100m before tax and management is working to streamline the firm’s UK dealership portfolio, unlocking another £100m in estimated savings. As well as these efforts, Pendragon is aiming to double revenue generated from used car sales by 2021. These efforts should eliminate group debt and improve margins. 

Overall, I’m optimistic on the outlook for both Pendragon and Marshall’s. There’s already plenty of bad news baked into their valuations as if the market starts to improve; it won’t take much for the shares to stage an impressive rally.