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Pendragon Rises On Trading Update – But Is It Sustainable? 

Trade Pendragon Shares Your Capital Is At Risk
Updated: 2 Dec 2021

Pendragon PLC (LON: PNG) upgraded their profit expectation for the year – this is the second time in only 2 months. The background here is the shortage of new vehicles caused by the chip shortage. 

The big question for traders is whether this increase in profits is supportable, will it continue into the next, 2022, trading year? Or will it fall back as the chip shortage itself and thus the supply of new vehicles sorts itself out? 

It turns out that trying to close down an economy then reopen it has its problems. One of which is that the car manufacturers cut their chip orders as they saw sales falling off a cliff. When they came back to order they found themselves at the back of the queue – auto chips aren’t leading edge and profitable for the chip fabs, they’re boring bread and butter work – and so they’ve not been able to make enough new cars to meet returning demand.

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The effect of this has been soaring used car prices. So much so that in some months it’s been the major determinant of inflation overall. 

For a car dealership – which is what Pendragon really is – this could go either way. A lack of new vehicles to sell could mean fewer trade-ins and just less business overall. Or, if they can get what new vehicles there are then they could gain business at the expense of others. There’s also the truth that they’ll have a stock of used vehicles, if those are rising substantially in price then they’ll be – even more than usual – buying cheap and selling dear. 

The combination of these effects is what has been driving profits up. The latest upgrade is from the £70 million prediction two months back to £80 million as the yearly total. 

The big question becomes whether this will carry on into the next trading period? If it’s just this year currently finishing then the current share price moves (up 12% over the month) look too high. Sure, bigger profits are nice but for just the one year they’re that, nice. But if the increase in both business and margins sticks then that price move is undercooked. Perhaps they’ve been able to steal market share from others and that increased portion of the market sticks? 

This is exactly the problem that the market, in general, is chewing over at present. The half-year profits were well up, we’ve had these two more recent guidance upgrades. All just lovely – but how long is it going to last? This sort of uncertainty is what produces a trading opportunity. Divining that future and then being on the right side of it makes money of course. 

This then comes down to an opinion on two things. How long is the car market itself going to remain disrupted? And how well is Pendragon’s management going to be able to exploit their advantage in it? Or even, the combination of the two, how long can Pendgragon’s management make extra money off that market disruption? 

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