Valuation 19/11/25, with current price of $29.70, and fair price of $27.10

Following research by Intelligent Investor, I bought into Eagers at around $10.50 mid 2024. Now around $30, I need to assess whether I want to stay or go. For those who don’t know Eagers, they are Australia’s largest owner of dealerships for new and used cars.

Bull case

• Eagers has share price momentum, tripling in the last year. Many investors now regard Eagers as a “quality” stock, granting a higher PE.
• The Board and key management own well over $200m in shares, have proven themselves as strong capital allocators, have clearly improved the business over the last 10 years, and looked after retail shareholders in their last capital raise to acquire CanadaOne.
• All divisions are firing and profitable: selling new cars, selling traded used cars, finance, insurance and service.
• They are clearly benefiting from their size, giving them bargaining power with manufacturers, cheaper financing, and efficiencies with property, staffing and technology. Their cost base is clearly stronger than competitors.
• Their recent strategic initiatives for “big box” locations for selling new and used cars has been successful, with significant benefits still to be gained from continued rollout.
• The recent CanadaOne acquisition (not yet given regulatory approval, although no one is suggesting it won’t be approved) appears well aligned. It grants even greater bargaining power with manufacturers, and provides an opportunity to roll out in Canada the big box used car centres that have been successful in Australia.
• Recent revenue was up 19% and NPAT up 9%, and that’s before the acquisition of CanadaOne.
• Balance sheet is solid, and acquisition of CanadaOne was well structured.
• Teasing out exact revenue and margins is a little difficult following the acquisition, in part because Eagers only acquired 65% of CanadaOne. But assuming roughly $16.5b in CY25 (their FY is the CY) attributable to Eagers shareholders, growing about 10% a year, that will give roughly $660m NPAT in CY30. With a PE around 25, discounting 10%, including 2.5% dividend yield, that gives a current fair price around $37.60. Based on current price, I forecast a 5-year ROI around 15%.

Bear case

• The bear case acknowledges that Eagers is a good quality company, but its market cap has run ahead of intrinsic valuation. The PE is in the mid-to-high 20’s, high for a cyclical low margin business.
• Perhaps revenue growth trundles along at a more modest 6% pa, a little above population growth plus inflation. And perhaps because of the economy slowing, or complications with the acquisition, maybe margin shrinks from roughly 2.2% currently to around 2%. In that case, we’ll be looking at something closer to $440m NPAT in CY30. With a PE of 16, dilution of 10%, dividend yield around 3%, to achieve a 10% return I get a current fair price around $16.30. Based on current price, I forecast 5-year ROI around -2%.

Base case

• If I weigh equally across the bull and bear cases, to deliver a 10% pa ROI, I get a current fair price around $27.10.
• At the current price around $29.70, I forecast a 5-year ROI of 8%.
• If wanting some margin of safety and looking for a 15% pa return, the buy price is around $21.70.
• At current price, with my larger than average position size, I’m planning to slowly trim. I’m reluctant to realise capital gains, and I know good things can happen with good management and share price momentum. But I have other opportunities, with much higher forecast ROI and currently lower position sizes, into which I can move some of my Eagers gains.