Motorpoint (MOTR) - Is the industry business model broken?
My doubts on healthy profitability in the used car market
While most of us focus on analysing specific companies, there comes a time when looking at the industry as a whole is useful. If the industry has big structural issues, then even the above average companies will suffer.
Is the used car supermarket model one of these structurally challenged industries?
Usually, my company analysis posts have quite a bit of financial numbers, etc. But this one I’m keeping number-lite, more a commentary on the industry.
About Motorpoint
The business is very simple. They run around 20 physical used car supermarkets across the country. This is up from like 12 before COVID, so quite an impressive expansion of the business in a mature industry.
They buy a whole bunch of nearly-new cars (1-4 years old, although they’ve expanded slightly out of that now I think). And the game is volume - get them on the lot, sell them quickly to limit inventory days, make a small profit (on the value of the car), and recycle the capital as many times as you can in a year.
Easy to understand business model.
The Industry
The industry itself, however, has undergone much transformation and turmoil in the last few years. To name but a few:
Huge competition from online-only players (Cazoo, Carwow, etc) during 2019-2023 where they were selling cars at a loss. Thankfully, most of them have run out of VC cash, and have shut down or just a shell of their former self.
Drying up of nearly-new car inventory in 2022, 2023. Supply chain issues meant less new cars were bought, as well as less company car leases (everyone working from home).
Massive boom and bust in pricing in 2021-2023. Because new car supply was so challenging, suddenly used cars were appreciating in value, instead of depreciating.
Huge increase in financing costs. Both for Motorpoint directly (their stock is mainly financed with borrowed money), as well as for consumers buying used cars (APRs have shot through the roof). Motorpoint has also suffered from the higher consumer APRs, because they have refused to fully pass on APR increases to customers, taking the hit to their commissions instead.
Looking at the above, you could argue that the first and second bullets are now positive trends for Motorpoint. Online competition is probably gone, for a while. New car inventory was alright in 2023 onwards, so the supply of nearly-new (1-4yrs) is only going to get better.
The third point seems to be stabilising, after a painful freefall in prices in H2-2023, prices have now stabilised.
The fourth seems like it is the key sticky point. Their finance expense in HY Sep23 was £5.3m, 83% higher YoY! Just extrapolating that out gives a yearly run-rate of £10.6m. In pre-covid years, they made operating profit margins of 2-2.5%. At the current revenue run-rate of c£1.2bn, 2% op profit gives only £24m, and so almost half is being eaten up by the finance costs. Not a very good business model, because you cannot grow your way out of it; the more sites they open, the more cars they need, the more financing cost incurred. Structurally, their variable costs have increased massively.
One way to get to a healthy net profit margin, after the finance costs, is either to have a strong balance sheet that funds the inventory, or unlocks access to reduced finance costs. But this would likely mean dilution for existing equity holders, if they wanted to shore up the balance sheet. Current balance sheet NTAV is only c£35m-£40m (FY Mar23), not super weak but not that strong either.
Another way is to make more gross margin on the used cars. However, this is a very cut-throat industry, and there are plenty of other car supermarkets out there. Cars are pretty much a commodity, and sites like Autotrader make it super easy to compare prices, and know what the cheapest in market is. This gives consumers power over pricing. Consumers have been known to travel hours to get a cheaper price, given that this is one of their biggest life purchases.
Is there an investment case for Motorpoint?
I’m not quite sure there is one. Sure, it can survive for many years, eking out tiny net profit margins. Growth will be tough due to a saturated market - already many car supermarkets out there. Motorpoint doesn’t seem to have any unique competitive advantage. But that tiny profit margin is fragile, and can quickly turn into a loss during turmoil, like we are seeing in 2023.
Can they aggressively grow and gain market share, and somehow gain pricing power? Unlikely, as they only have 2.5% market share (HY Sep23) at the moment. It will take much growth to get any sort of market dominance.
Can they increase their operating margins? Possibly. But this is a mature industry, there is no new innovation currently that can radically transform their business processes. So the scope here is limited.
Taking some back-of-the-envelope calculations… £1.3bn revenues, 2.0% operating margin (same as pre-covid), £10.6m finance costs, gets me about £15m PBT, £11.6m PAT, and 13p EPS. Given the weak balance sheet, slow industry growth, and the wafer thin operating profit risks… I wouldn’t really want to pay more than 5x PE as an entry point, so this share might only appeal to me at around 64p. Which is half the price it is currently trading at.
Motorpoint has been on my watchlist since Aug 2020, but I think it is about time I retire it off the watchlist, given my valuation is so far below what it is trading at currently, and also because I believe the industry is structurally challenged.
Nice article. However, I'm not convinced there's a problem with the car supermarket business model itself -- maybe just with Motorpoint.
Cargiant in west London continues to absolutely print money -- a PBT of £42m on turnover of £398m in the most recent year available to December 2022. This was a 46% yoy profit increase, while Motorpoint slumped to a LBT for their similar period to March 2023.