1 growth stock I’m holding for the next decade

Cambria Automobiles (LSE: CAMB) is one of the cheapest stocks on the market. Shares in the company currently trade at a P/E of 6.7, around a third below the five-year average of 9.3 and less than half of the UK market average of 14.1. 

However, many believe the company deserves this low multiple because it operates in a highly cyclical industry. 

Today’s full-year results from the company show just how cyclical the business is.  

After reporting a record operating profit of £12.4m last year, operating profit declined by 4.8% for the year to 31 August. Even though revenue for the period rose by 4.9%, most of this growth came from the group’s aftersales division, which reported revenue up 9%. New vehicle sales declined 11.7% in the period, while used vehicle sales slid 6.1%. Overall, earnings per share dropped 0.9%. 

As bad as it seems? 

Many City analysts believe there’s more pain ahead for the UK car sales industry. 

Indeed, analysts expect falling consumer spending coupled with high levels of debt (the UK borrowed a record £31.6bn in 2016 to buy cars) will mean customers delay purchases or upgrades. 

To a certain extent, these concerns have become reality. Cambria’s results show that new car sales are falling. Nonetheless, sales are falling off a high base. 

For example, even though new car registrations are projected to fall by 4.5% for the full-year to 2.57m, this number is still 10% above the mean average of 2.35m for the past 17 years — according to Cambria’s data. 

This is why I’m positive on the outlook for the company. Even though the market seems to have written off the business, the current operating environment does not seem to be as bad as its valuation suggests. 

Also, Cambria has a record of creating value for shareholders, and even though the car market is coming off the boil, I expect this to continue. 

Creating value for shareholders 

I believe that its value lies on its balance sheet. Over the past seven years, the company has grown book value per share from 19.5p to 50p as reported for the year to August 31, a compound growth rate of 17%. Of the total 50p per share, £45.2m is freehold property, which is funded with £17m of debt. There’s also £23m in cash giving net cash of £6m. In other words, the balance sheet is rock solid. 

With a market value of £62m and a book value of £50m, the market is ascribing almost no value to the underlying business. 

What about the outlook

So, Cambria looks cheap but what about the group’s outlook? 

Well, falling car sales is a concern, however, right now the stock is priced for the worst case scenario. Around half of the firm’s outlets sell luxury vehicles, which tend to be less sensitive to cyclical trends. Then there’s also the aftersales division to consider. Even though aftersales is only 11% of the total revenue mix, it accounts for 38% of group gross profit. 

All in all, even though the business environment might get tougher for Cambria, the company won’t vanish overnight, and while the firm is facing headwinds right now, over the next decade, growth should return, and in the meantime, shareholder equity should continue to grow.