Coronavirus Impacts – Victoria, Auto Trader and Bowling Alleys

Stock market investors are clearly becoming nervous again following a rise in Covid-19 infections in the UKA – particularly in the Southern and Western states. This has affected the US stock markets and, as usual, it has affected UK markets in sympathy.

There were two announcements this morning that were interesting as regards the impact of the virus epidemic and the resulting “lockdown” of the population. Home working has become more normal or people have been “furloughed” or permanently laid off.

Victoria (VCP), a manufacturer of floor coverings, had to close their factories but they have all now reopened. Their customers are mostly retailers and many of them had to close but are now reopening or already have done. The company says group revenues for the last three weeks are now at 85% of pre-Covid-19 budgets.

Interestingly they say this in today’s trading update: “It is important to remember that 93% of Victoria’s revenues are derived from consumers redecorating their homes, not construction or commercial projects, and consumer demand for home decorating products appears to be strong across the world. This is not altogether surprising, given the extended period consumers have spent in their home over the last four months, which is likely to have encouraged the impulse to redecorate”. Clearly it’s time to do some DIY jobs.

Auto Trader Group (AUTO) announced their final results for the year ending March 2020, which contained an update on current trading. They provide a web portal for car dealers, who all had to close. Auto Trader provided free advertising in April and May plus a 25% discount in June. As a result they lost money in those months. The company has also chopped the dividend, cancelled further share buy-banks, did an equity placing and used the Government’s Job Retention Scheme. A vigorous response in essence, rather like that of property portal Rightmove.

Car dealers are reopening but for most you cannot just walk in to the dealer. You have to make an appointment. This encourages web shopping for a new car which is to the advantage of Auto Trader. The company announcement (and what was said in their web cast which was otherwise somewhat boring as it consisted mainly of reading a script), was generally positive but it leaves a question as to how soon car sales will recover. They don’t seem to be losing many dealers and dealer stock figures are what matter rather than sales. But dealers’ revenue and profits might come under pressure as many car purchases can be postponed. Cars do wear out of course, but with mileage reduced as there were, or are, few places open to go to and more home working is taking place, this could reduce car sales.

This is therefore a company where one needs to look to the future and how they can capitalise on the trend to shop for cars on the internet, like one might shop for groceries or clothes of late. One competitor mentioned in the conference call was Cazoo who sell (or lease) cars directly on the internet. No test drives or inspection first. You just get 7 days to trial it before acceptance. This is clearly a different business model that might affect traditional dealers although they also provide service of course and concentrate on new cars which is a more complex sales process. There may also be an issue of trust when using an on-line service. But the process of buying and selling cars certainly needs simplifying from my last experience of doing so.

At least bars and restaurants can reopen, albeit with severe restrictions on social distancing. That will certainly reduce their sales volumes and increase their costs, resulting in a big hit to profits. Still a sector to avoid I think.

Bowling alleys were expecting to be able to open from the 4th July based on what Ten Entertainment (TEG) and Hollywood Bowl (BOWL) said. But the recent Government announcement has put a stop to that along with the reopening of gyms and swimming pools. They now hope to reopen in August.

Is this ban rational? I can see why indoor gyms might need to remain closed. A lot of heavy breathing and sweating in close proximity. But bowlers don’t exert themselves much from my experience and if alternate lanes were used social separation would be good so long as they used their own shoes.

Note that I hold shares in some of the above companies. But thankfully not in Wirecard which I previously commented upon and which is now filing for bankruptcy proceedings.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

You can “follow” this blog by clicking on the bottom right in most browsers or by using the Contact page to send us a message requesting. You will then receive an email alerting you to new posts as they are added.

 © Copyright. Disclaimer: Read the About page before relying on any information in this post.

A Quick Guide to New Issues, SMRs, Car Market and Brexit

In today’s Financial Times (11/11/2017) Neil Collins gave a quick guide to new issues which is worth repeating. This is what he said: “Do not buy into an initial public offering if most of the capital raised is going out of the business, or if it replaces existing debt (because the capital has already left). Do not buy if private equity is selling. Do not believe any forward-looking statements, because if the prospects really were that good, the vendors would wait and get a higher price. Do not buy any share that has been listed for less than a year. You will miss some bargains but you will avoid many more disappointments. Leave it to the professionals to lose other people’s money.”

Those are wise words indeed. He also made some ascerbic comments on small nuclear power stations which he says have been rebranded as “small modular reactors” (SMRs) to make them less scary. Rolls-Royce, who have produced such reactors for submarines, have touted them as a potential future business growth area for several years, but the FT’s in-depth review of the subject last week suggested that they are not likely to be put into production any time soon. Meanwhile the share price of Rolls-Royce is still below where it was in 2014.

Neil Collins also commented on the car market. You probably don’t need to be told that new car sales have slumped. The share prices of car dealers are cheap as chips and even my shares in Auto Trader are down substantially this year. Indeed one could apply Neil’s comments about IPOs to the company although it has taken a couple of years to reveal that the debt when listed is handicapping the company now. The car market is inherently cyclical which is one reason why car dealers are normally not valued highly, and they also show low barriers to entry with the car manufacturers controlling the market to a large extent and limiting the profits that dealers make. But Auto Trader is similar to Rightmove in the property market. High margins, dominant market position and a business with great network effects with the result that competitors find it difficult to muscle in on their market. I think I’ll stick with it for a while yet.

I am not convinced that we have reached “peak car” as some have suggested. There seem to be more cars on the road than ever although traffic volumes have slowed in London where most such commentators live. But that is as much about political policies that have limited road space and caused congestion, mostly irrational, than car buyers desires. Another good analysis in the FT recently was about how “green” various car types actually are. On total life emissions, some smaller petrol/diesel vehicles can beat “all-electric” cars. How is that? Because the manufacture and decommissioning of electric vehicles generate large emissions, and producing the electricity for them often does also.

With all these plugs I just gave for the FT, it is unfortunate that it coninues to publish such tosh about Brexit. Most of their writers predict the financial outcome will be calamitous. Whether that will be the outcome or not, I don’t have the space to provide a full analysis here, but most people who voted for Brexit did not consider the financial issue as conclusive. Consider an American colonialist in the year 1775, before their declaration of independance. No doubt with an economy very reliant on trade with Great Britain many people would have counselled against leaving the protection of their parent country. Did that deter them? No because they valued freedom more highly. They wanted control over their own affairs including that over taxes, and not to be ruled by a remote and undemocratic regime where they had minimal representation. That is the analogy that all the remainers should think about.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

You can “follow” this blog by clicking on the bottom right.

© Copyright. Disclaimer: Read the About page before relying on any information in this post.