Demand for cars dropped during the height of the pandemic and a shortage of new cars being manufactured has driven up the value of used cars! FTSE 250 incumbent Inchcape (LSE:INCH) has been affected by these factors, so should I buy shares for my portfolio? Let’s take a look.
Global powerhouse
Inchcape is a global automotive firm involved in the sale, distribution, and importation of motor vehicles. It also offers financial services. Some of the world’s leading brands work with Inchcape and these include Mercedes Benz, BMW, and Audi to name a few. Inchcape employs over 5,000 people, and in the UK alone has approximately 100 dealerships.
As I write, Inchcape shares are trading for 832p. A year ago they were trading for 614p, which is a 35% return across 12 months. The FTSE 250 index it resides in has only returned 13% in the same period.
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For and against
FOR: Despite a turbulent 18 months for the world and the automotive sector as a whole, Inchcape has been performing well. This is demonstrated by its latest Q3 update reported at the end of October. Group revenue increased by 27% compared to the same period last year. It is only 2% behind 2019 levels. Double-digit revenue growth in both retail and distribution arms boosted overall revenue. Profit for the full year is expected to be close to £300m, which is ahead of guidance.
AGAINST: There has been a well-documented shortage of semiconductors, which are essential parts of many tech products as well as newer vehicles. This has resulted in manufacturing shortages and a shortage of newer cars for sale. If this continues, I believe Inchcape and the sector as whole could be affected negatively until it is resolved.
FOR: Inchcape has grown organically into the powerhouse it currently is. Despite the pandemic and tough market conditions it continues to strive to enhance its offering and continue its growth. An example of this is its recent deal signed with Chinese firm Geely. This will provide it a route into a new market and territory. This type of activity excites me as it shows growth ambitions that could result in boosted performance and further returns for potential investors.
AGAINST: Current macroeconomic pressures as well as the threat of new Covid-19 variants are risks for Inchcape as well as other FTSE 250 stocks. Firstly, rising costs and inflation could eat away at margins and affect profitability. The supply chain crisis and shortage of HGV drivers in the UK could affect UK operations which are of a substantial size to the group as a whole. Finally, if new restrictions linked to new variants come into force, sales could drop and operations could cease temporarily as well.
FTSE 250 opportunity
After reviewing all the pros and cons I am leaning towards investing in Inchcape shares for my portfolio. Over the longer term I would expect an established growing company with a history of success to continue its upward trajectory and provide returns for my portfolio. I also believe macroeconomic pressures will not last forever.
