Torotrak plc (LSE:TRK): Is Now The Time To Bet On Automobile?
Torotrak plc (LSE:TRK), a GBP£2.14M small-cap, operates in the automobile industry whose long product cycles and deep capital investments make planning ahead a difficult endeavour. Upcoming challenges facing the sector is navigating the path from current automobile models to driverless cars, requiring high capital outlays in emerging technology. The limitation of automobile incumbents is an opportunity for tech giants such as Apple and Google to develop their own software components behind networking, autonomous and communication capabilities of automobiles. Automobile analysts are forecasting for the entire industry, a positive double-digit growth of 12 percent in the upcoming year, and an enormous growth of 50 percent over the next couple of years. However this rate still came in below the growth rate of the UK stock market as a whole. Is now the right time to pick up some shares in automobile companies? In this article, I’ll take you through the automobile sector growth expectations, as well as evaluate whether TRK is lagging or leading its competitors in the industry. See our latest analysis for TRK
What’s the catalyst for TRK's sector growth?
The growing presence in the auto industry of technology firms incontrovertible. In the next decade, software integration will likely have a significant impact on the auto industry, given the alignment of their expertise – they are proficient at seamlessly connecting components to create networks valued by consumers for the information, efficiencies, and experiences they deliver. In the past year, the industry delivered growth of over 100 percent, beating the UK market growth of 16 percent. TRK lags the pack with its negative growth rate of -2377 percent over the past year, which indicates the company has been growing at a slower pace than its automobile peers. As the company trails the rest of the industry in terms of growth, TRK may also be a cheaper stock relative to its peers.
Is TRK and the sector relatively cheap?
The automobile industry is trading at a PE ratio of 17 times, lower than the rest of the UK stock market PE of 30 times. This illustrates a somewhat under-priced sector compared to the rest of the market. Furthermore, the industry returned a higher 26 percent compared to the market’s 19 percent, potentially illustrative of a turnaround. Since TRK’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge TRK’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? TRK has been an automobile industry laggard in the past year. If your initial investment thesis is around the growth prospects of TRK, there are other automobile companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how TRK fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If TRK has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its automobile peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at TRK’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into Torotrak's stock, take a look at the company's latest free analysis report to find out more on its financial health and other fundamentals. Interested in other automobile stocks instead? Use our free playform to see my list of over 50 other automobile companies trading on the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
