Car retailers like penny stock Lookers (LSE: LOOK) face considerable near-term pressure. This was emphasised by latest new car sales data this week.
On Tuesday, the Society of Motor Manufacturers and Traders (SMMT) said that new vehicle registrations slumped 20.6% last month to 124,394 units. This was the second-biggest May decline since 1992.
According to the SMMT: “Supply shortages continued to hamper new purchases and the fulfilment of existing orders”.
But weak car production rates right now wouldn’t discourage me from buying Lookers shares. That’s even though supply problems aren’t the only threat to earnings either!
A risky penny stock to buy?
Revenues at car retailers also threaten to be struck in the near term by the cost of living crisis. Also on Tuesday, the British Retail Consortium (BRC) said that UK retail sales shrunk 1.1% in May. This was well below 12-month average growth of 4.1%.
The BRC suggested the numbers were worse than how they appear at first glance too. It said that “[with] inflation running at historically high levels, the small drop in sales masked a much larger drop in volumes once inflation is accounted for.”
May’s data was particularly chilling for sellers of expensive goods like Lookers too. BRC chief executive Helen Dickinson noted that “higher value items, such as furniture and electronics, took the biggest hit as shoppers reconsidered major purchases during this difficult time.”
3 reasons I’d buy Lookers shares
You might think then that Lookers is a penny stock I’ll be avoiding like the plague. This actually couldn’t be further from the truth.
There are several good reasons I think Lookers remains an attractive UK share to buy. These include:
- Improving margins. Those supply shortages are currently helping to push margins at the business higher. Gross profit margins rose to 12.8% in 2021 versus 11.1% previously. They could remain strong as semiconductor shortages drag on car-build rates.
- A strong used car operation. Lookers sources just over half of revenues from the sale of pre-owned vehicles. While new car demand could suffer as the cost of living crisis worsens, this could feed through to better sales of cheaper used models.
- Exciting electric vehicle projections. As a long-term investor I’m tempted to buy Lookers to exploit soaring demand for electric vehicles. Sales of low-carbon vehicles are tipped to explode over the next decade and a half as concerns over the climate crisis worsen.
A brilliant bargain
Indeed, heavy share price weakness in recent months means I think Lookers could be a great dip buy for me. At 77.8p per share, the retailer trades on a forward price-to-earnings (P/E) ratio of 7 times.
At current prices, Lookers carries a meaty 3.8% dividend yield too, providing a nice bonus. And the predicted annual dividend for 2022 is covered 3.8 times by expected earnings, meaning there’s a good chance this target will be met even if profits fall short of forecasts.
I think Lookers is a top bargain stock for me to buy today.