Just over two weeks ago, Inchcape, the car dealership and sales group, released an unexpected trading update. Having told shareholders back in April that profits would be around £300million for 2022, chief executive Duncan Tait said the group was now likely to do considerably better than that.
With sales and margins moving at pace and order books at record levels, Tait suggested full year profits would be closer to £370million, a 54 per cent increase over 2021 underlying figures.
The news was a surprise to City analysts, who quickly upgraded their forecasts for the company. But it was perhaps even more of a shock to the wider market. After all, prevailing wisdom has it that the motor industry is struggling, as sales fall and supply chains buckle.
Sales drive: Inchcape has over 100 dealerships in the UK but more overseas, including Australia and the Caribbean
Inchcape’s current performance indicates that theory may be wrong. It operates just over 100 dealerships in the UK, selling around 80,000 cars a year, from top brands, such as Mercedes, Porsche and Jaguar, to runarounds like Toyota and Volkswagen.
Electric vehicles and hybrids add to the mix, with a healthy sprinkling of used cars too. The business helps Inchcape to form close bonds with big carmakers, but it is small beer from a profit perspective.
Inchcape makes the vast majority of its money overseas, operating in 40 countries around the world, from big developed economies such as Australia and New Zealand to tiny Pacific islands such as Guam. The firm also works in a host of Latin American, African and Caribbean states, as well as many smaller European countries, from Romania and Bulgaria to Belgium and Luxembourg.
In these regions, Inchcape acts as a distributor rather than just a dealer. That means the company does pretty much everything for car producers apart from actually making their vehicles. They bring cars from the factory gate, set up clever marketing strategies, sell the cars and handle servicing and repairs as well.
The markets where Inchcape operates vary hugely but share certain characteristics. Consumers want to be able to buy cars easily and cost-effectively and carmakers want to work with firms they can trust. Inchcape ticks both boxes.
The company has long had a reputation for reliability and integrity, qualities that carmakers really seek out, especially the more upmarket brands, where reputation is paramount.
Under Tait, however, Inchcape has made a real push in the digital world – so that would-be car owners can do almost everything online, including customising vehicles and securing finance. Some places will even deliver new cars to the home so motorists do not need to set foot in a showroom.
The digital push makes sense. More than 90 per cent of consumers the world over start looking for a car online. Tait and his crew make it their business to put the carmakers they work for near the top of the pile. The group is also investing heavily so that consumers can find what they need once their search becomes serious.
Inchcape performs all kinds of clever analysis too so it can work out which cars are most likely to appeal to certain markets and how best to make the buying process as effortless as possible.
All these tactics are really bearing fruit. In Chile, for example, Inchcape recently took over a dealership which was selling 400 Volvos a year. This year, it is forecast to sell more than 4,000.
This is the type of growth that Tait is looking for. Around 90 million cars are sold each year, of which 17 million are sold by independent distributors.
Inchcape is the largest of the breed but it has little more than 1 per cent of the market, a percentage Tait intends to increase organically and by acquiring smaller distributors, many of which find it hard to keep up with the demands of top car firms.
The group is keen to up its game in the used car market too, and Tait is making a determined effort in the electric vehicle sector, even in countries where charging networks are relatively undeveloped.
Challenges remain. Earlier this year, Inchcape moved out of Russia, selling its highly profitable Russian business to management. Looking ahead, there may be dips here and there, if economic pressures become deeper and more widespread.
Yet Inchcape is robust and cash-generative, and it operates in places where car ownership is a real aspiration because it can transform lives and livelihoods.
As such, brokers expect sustained sales and profits growth over the next few years, accompanied by rising dividends – 27.55p for 2022, 28.9p for next year and almost 33p in 2024.
Midas verdict: At the beginning of this year, Inchcape shares were £9.40. Today they are £6.91, even after the recent profits upgrade. The slide reflects wider market worries about economic growth but it does not reflect Inchcape’s long-term prospects or its proven resilience over many years. The stock is a buy – and the dividend provides an income kicker too.
Traded on: Main market Ticker: INCH Contact: inchcape.com or 020 7546 0022