Vehicle sales appear to be plateauing near their highs. Data released by the Australian Bureau of Statistics (ABS) shows that vehicle sale volumes are down slightly over the past few months, however they are up 7.6% year on year.
A major contributing factor to the strength in car sales is affordability. It turns out that automobiles are at their most affordable levels in 35 years. Partly this is on account of the strong exchange rate, which if the Australian dollar keeps falling, could possibly become an issue and is one factor to keep an eye on for investors in this sector.
Buoyant sales certainly bode well for the major car retailers. Automotive Holdings Group (AHE.AX) has 85 passenger vehicle, truck and bus dealerships across Australia and New Zealand and is achieving record sales. Fellow retailer AP Eagers (APE.AX) sells nearly 4% of all new cars sold in Australia through 97 dealerships. AP Eagers also owns strategic investments in MTAI Insurance, carsguide.com.au and Automotive Holdings Group. Also of note, AP Eagers has paid a dividend every year since listing on the ASX in 1957. Meanwhile four-wheel-drive manufacturer and distributor ARB Corporation (ARP.AX) is trading near record highs as it continues to benefit from its off-shoring strategy and entry into new markets.
Car retailing and car parts wouldn’t probably be the first place investors would look for investment opportunities. However it turns out that certain businesses have managed to carve out profitable niches for themselves. As the chart below shows, shareholders have certainly benefited from these niche players with all three companies significantly outperforming the S&P/ASX 200 Index (^AXJO) (XJO.AX) over the past 5 years.
Source: Google Finance
There’s a lesson in the outstanding shareholder returns of these three businesses for investors. Firstly, buying companies with conservative balance sheets that pay dividends and grow their profits in a reasonably predictable way is a tried and true way to grow your wealth. Secondly, these companies are quietly buzzing along in relative obscurity, highlighting the potentially rewarding hunting ground of small and mid-cap stocks.
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