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This ASX stock hits record high as it promises 21% earnings growth

Brendon Lau

The AMA Group Ltd (ASX: AMA) share price has jumped to a record high this morning after the panel beating and automotive services group released a trading update.

The AMA share price advanced around 3% to $1.29 at the time of writing, taking its gain to nearly 50% since January when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 16%.

Investors found new reason to keep bidding the stock higher as management is forecasting an extra $120 million in revenue and $12 million in earnings before interest, tax, depreciation and amortisation (EBITDA) from recent acquisitions and Greenfields expansion of its panel beating network.

Profit upgrade

The upgrade is based on a 12-month run rate once the eight takeovers are bedded down and new shop openings (three in total) are established.

The earnings increase equates to around a 21% uplift to the group’s expected EBITDA for the current financial year, which management reiterated will be around $58 million.

AMA has a good track record of growing by acquisitions under its last chief executive Raymond Malone (who has since become the executive chairman) and the group continues to show good discipline when it comes to mergers and acquisitions (M&A).

Is it time to take profit?

The average multiples paid for targets are an attractive 3.8 times earnings, although some may be concerned with the growing amount of debt used to help fund these deals.

There’s also a shift in focus with the group expanding into the heavy motor space and has taken the third largest east coast consolidator.

However, its gearing levels haven’t reached a point that would worry me even though it’s up significantly from a year ago.

Foolish takeaway

What’s more, I think a shift in the group’s strategic initiative is welcomed as I have been concerned about the longer-term growth of panel beating with the impending arrival of more autonomous vehicle technologies.

The rise of cars that can automatically help drivers avoid collisions is likely to make a big dent in the industry (all pun intended!).

Also, I take comfort in the fact that Ray Malone continues to be heavily involved with the group. Often a change in leadership and strategic focus is enough to prompt many to dump the stock.

I can’t tell you how many times I’ve regretted not selling a stock on the changing of the guards – especially when it comes to small cap stocks.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019