This article is authored by MOI Global instructor Alex Bossert, founder of Bossert Capital, based in Minneapolis–St. Paul. Alex started the firm in February 2017 to invest money on behalf of a select group of long term-oriented, business-minded wealthy families and individuals. Alex is an instructor at Best Ideas 2018.
Cambria Automobiles is a United Kingdom based auto dealership group that was founded by current CEO Mark Lavery in 2006 to pursue a dealership roll-up strategy. Lavery owns 40% of the outstanding shares and from a starting capital base of only £10.8m has built Cambria into a business with a market cap of £64m along with operating earnings of £11.8m in 2017. This impressive performance over the past 11 years has been achieved during a period that has included two recessions in the UK.
Auto dealers are good businesses and Cambria has averaged an ROE in the high teens. In 2017, Cambria earned an ROE of 20%. 40% of Cambria’s gross profits are generated by aftermarket (parts and service) which is not cyclical and will benefit from multiple tailwinds over time. Used car sales make up another 30% of gross profits and this portion of the business is consistent and growing.
Cambria is trading for just 6.9 times earnings. Earnings are being depressed by two temporary factors that I will discuss in further detail in the valuation section. Going forward, this business has multiple tailwinds that will benefit earnings in the long run. 1) High margin aftermarket parts and service revenue are consistently growing. 2) Many of their acquired dealerships have not reached their full operational potential. 3) There are six capital projects under way that will contribute to earnings once complete. 4) Cambria’s management team has demonstrated intelligent capital allocation decisions over time and I expect them to continue to deploy existing cash flows into intelligent acquisitions.
Cambria trades at a large discount to peers in the United States and historical acquisition multiples in the UK. Eventually, I believe Cambria will reach £1 billion in sales and earn a 2% pre-tax margin. If this is achieved and Cambria trades in line with US peers and historical buyout multiples, Cambria is likely to be worth 4 times the current price in 5-7 years.
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