Description

Motorpoint is a well-run, attractive business trading at <11x P/E.  This is too cheap for an advantaged company with a clean balance sheet that is likely to double EPS over the next seven years. 

Company description

Motorpoint is a niche retailer of newly-used cars.  The company has 12 locations, all in the U.K.  The company’s business model is similar to CarMax (high inventory turns, price transparency, no-haggle policy).  The average car MOTR sells is <2 years old, with <15k miles on it, and is priced at ~£14k.  John Kimble wrote up MOTR in mid ’17.  I recommend reading that writeup for background. 

Thesis point 1:  MOTR has a better mousetrap.

Motorpoint’s primary competitors are franchise dealers that have significantly higher cost structures.  OEMs require franchisees to build luxurious showrooms located on expensive real estate.  It is not atypical for a dealer to spend £10-20mm in initial capex on a single location.  In addition, franchised dealers will generally only sell one brand and are unable to competitively price “nearly new” cars because it would undermine new car pricing (and anger the OEMs). 

In contrast, Motorpoint is unconstrained by OEM requirements.  The company leases larger lots in cheaper locations, is frugal with improvements (~£500k per site) and can sell any make and model (MOTR carries ~35 brands).  This lower cost structure and greater flexibility enables Motorpoint to undercut traditional dealers and still make a nice profit.

Motorpoint also compares favorably with other independent used car dealerships.  Motorpoint has substantial scale advantages that allows it to dominate these smaller players.  Very few used competitors have the procurement scale required to drive volume-based discounts from fleets.  They also are unlikely to have access to floorplan financing on comparable terms which impacts the carrying cost and capital intensity of the business.  Smaller competitors also do not have the volume to negotiate comparable commissions from extended warranty companies and auto loan providers.  Nor can they afford to have the breadth of inventory (entire range of Motorpoint’s cars are available online to be shipped to any location). 

Motorpoint also benefits from lower customer acquisition cost.  The company has built up substantial goodwill over time by offering good customer service and a strong value proposition.  Net promotor scores have consistently been in the mid-70s, which is excellent in an industry known to be scummy.  As a testament to this, over 40% of cars are bought before physically seeing the car.  This stellar reputation has led to a steady pipeline of customer referrals and repeat purchases (currently 1 in 4 sales are to returning customers). 

Moreover, Motorpoint is large enough where it has its own profitable online-auction site to dispose of trade-in cars.  This allows them to circumvent the high-fee auction house (BCA) that most dealers have no choice but to use. 

Thesis point 2:  MOTR can grow at attractive returns. 

Sales have grown organically at a 19% CAGR since 2013 and earnings have more than tripled.  Despite this, MOTR is still only ~4% of the used car market and has a nice runway to continue to grow as the company opens new locations and gains market share. 

I expect MOTR to open an average of one new location per year over the 6-7 years.  Each location will have the potential to earn £2mm+ pre-tax per location when fully ramped.  The company is also investing in preparation facilities to allow for more selling space at existing locations.  Overall, ROIC has been running north of 20% when counting floorplan financing as invested capital. 

Thesis point 3:  Management is solid and well-aligned.

I’ve spoken with Mark Carpenter (CEO) and James Gilmour (CFO) and am impressed by both.  Mark has a great background and owns 9.3% of shares.  He is conservative in nature and is running a straightforward playbook.  I trust him to reinvest wisely and to return excess capital to shareholders. 

Earnings outlook:

The current NI run rate is ~£19mm.  After a pause this year (weak consumer sentiment, headwind from warranty program run-off), I think the base business can grow NI by 5% per year (primarily due to share gains and maturing locations).  The 6-7 additional locations could contribute another ~£8mm (and ramping) in year 7.  If management reduces the share count by 2% per year (just authorized a £10mm buyback) EPS will have doubled (10.6% CAGR).  The TSR is likely be even higher as the company pays a generous dividend (3.6% TTM). 

Risks:

-          Hard Brexit

-          Competition drives down gross margins

-          Higher interest rates

o   Would raise cost of floorplan facility.

-          Cyclicality

o   MOTR has low price risk because the company turns its inventory 9-10x per year.

o   Volumes are cyclical.   According to the company, in ’08-’09, MOTR volumes were down 8-10%.  However, the earnings hit was mitigated by margin expansion.  Metal margins rose from £650-800 per car as the prices MOTR paid for cars (from fleets) declined faster than retail prices.  It is difficult to know how this dynamic will play out in the next downturn.  

-          Evolving landscape leads to new competition

o   Motorpoint has a robust e-commerce offering, a trusted brand, a deep inventory, and economies of scale.  I think they are as well positioned as anyone to do home delivery if the market moves in that direction. 

Catalyst

cash flow