Warren Buffett is undoubtedly the world’s most famous value-orientated investor. Following his mentor Benjamin Graham, author of The Intelligent Investor, he likes to find shares trading at a discount to their net asset value. This is called a margin of safety.
I think I’ve found a cheap UK share that would appeal to Buffett.Â
Loads of property makes this very cheap
That share is the automotive retailer, Vertu Motors (LSE: VTU). The group’s property, according to analysts at Liberum, is worth 61p a share. The analysis has an 80p target price. With shares trading at the time of writing at about 41p, that’s a pretty comfortable margin of safety. As an investor, I get a property business for less than book value and a car retailing business on top of that. That’s why I recently added the stock to my portfolio.
It means the price-to-book ratio is around 0.6, which makes the shares incredible value. The price-to-earnings is about eight currently. It’s likely to fall further in the coming years as earnings grow.
Why else might Warren Buffett like the shares
Despite how cheap the shares are, sales are expected to grow. According to Liberum, sales will go from £2.55bn this year to £3.90bn by 2023. That to me looks like very solid top line growth for such a cheap company. The company will also move from a net debt to a net cash position in those years.
Demand for used cars has been strong this year, in part because of global semiconductor and supply chain issues, which affects new car sales. This pushes up prices and Vertu, and indeed its competitors have been releasing positive statements in recent weeks. In turn, this could lead to earnings upgrades as analysts pencil in future growth. This could boost the share price.
Overall it strikes me as the type of cheap UK share that has Warren Buffett style characteristics. That’s why I’ve initiated a position.
The share price could fall
Of course, no investment is without risk. Vertu Motors is no exception. The market could continue to punish the shares because it sees the company as being in a market in long-term decline. Operating margins are also very slim, leaving relatively little room for error if costs increase.
Also, returns on capital also aren’t particularly high so compared to other industries this isn’t an obviously highly profitable market. Yet Vertu in fairness is consistently profitable.
The automotive industry is also changing, so can Vertu management adapt to survive in a world of electric vehicles?
As I said, I like the share and despite the risks I’m more likely to add to my holding than sell the shares. Any dip in the share price would in my book just increase the margin of safety and offer even better value.