Shares digital

Pendragon (PDG) 33p

The motor dealership has crashed with a 51% drop in profit as car prices fall. (Read the full story: www.sharesmagazine.com/node/3310)

Shares says: Rising interest rates in 2007 had a negative impact on car prices, making life tough for vehicle dealerships, as illustrated by Pendragon’s significant drop in earnings. Not only did revenue stay flat at £5.1 million but lower car prices for new vehicles pulled down margins on used car sales. This resulted in annual pre-tax profit dropping to £46.5 million. HOLD

Telegraph says: Two big purchases likely to hit the skids in a downturn are new houses and new cars. We’ve seen how bad house builders are finding the going, now we have an idea of how the car dealers are faring. As utility and council tax bills rise above inflation, the capacity for consumers to take on more debt or make big discretionary purchases is increasingly limited – namely cars. Pendragon, however, isn’t quite the basket case you may imagine. The company has undergone a useful self-help process, closing unprofitable dealerships and using the proceeds to pay down what remains a relatively large debt pile. It is also changing its sales mix. Instead of focusing on flashy new motors with price tags of £25,000 upwards and nearly new vehicles with only a few miles on the clock, the company is banking on shifting more used cars of the old and cheap variety. AVOID

The City - Panmure Gordon says: While the valuation of 7 times’ 2008 EPS and 11.8% yield looks attractive, it is too early to start factoring in margin improvements. With 2008 likely to be a tough year for motor dealers, we continue to favour Inchcape in the sector and remain cautious on Pendragon. HOLD