The UKs largest automotive retailer,Pendragon(LSE: PDG) released atrading update for the three months to 30 Octobertoday, and the news has really impressed the market.
Pendragons shares jumped 9% in early trade, after the update from management revealed that the companys operating profit for the period had jumped 28.8% year on year.
Whats more, managementannounced today that after several years of stabilising the business, reducing debt and cutting costs, the group is now starting to expand again. For example, during the last three months Pendragon launchedSell Your Car, a competitor to webuyanycar.com. Sell Your Car will offer customers the highest price for their used vehicles. in an attempt to pull sales away from webuyanycar.com.
Further, Pendragon announced today that itsunderlyingdebt to EBITDA ratio had fallen to 0.7, comfortably below the groups targeted range of 1.0 to 1.5. As a result of this lower than targeted debt ratio, Pendragon is now looking to expand its UK footprint. Management will reveal more about the companys expansion plans alongside full-year results.
Despite Pendragons performance over the past year, as well as todays news, the company is still trading at a lowly valuation. Indeed, at present levels Pendragon is trading at a forward P/E of 11.2.
City analysts currently expect the companys earnings per share to jump 20% this year, which means that Pendragon is trading at a PEG ratio of 0.6, indicating growth at a reasonable price. Current City figures estimate that Pendragons earnings will expand a further 6% during 2015. So the company is trading at a 2015 P/E of 10.5.
Its also interesting to note thatGMT Capital Corp, a value oriented investment manager with $5bn of assets under management, recently acquired a 6% of Pendragon.
Nevertheless, some investors may be put off by Pendragons current dividend yield, or should I say lack of it. At present the companys shares only support a yield of 1.3%. There are certainly better dividend yields on offer elsewhere.
However, management has stated that they will consider hiking the companys dividend payout when full-year results are released. As Pendragons dividend payout is currently covered nearly six times by earnings per share, theres plenty of room for management to increase the dividend.
Theres no denying that Pendragon looks attractive at present levels. Nevertheless, the automotive market is extremely unpredictable and the markets growth is dependent upon the health of the wider UK economy situation. Therefore, some investors may be concerned about Pendragons outlook.
Still, Pendragon is expecting slow and steady UK car market growth this year, with overall sales expected to expand by 2%. Year to date registrations to 30 September 2014 increased by 9.1% year on year. So, the market is expanding, along with the wider economy.
The bottom line
All in all, todays update from Pendragon shows that the companys growth is continuing at a rapid rate and at present levels the company appears to be undervalued.
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Rupert Hargreavesowns shares in Pendragon PLC . The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.