After a massive four-week run that saw the stock price more than double, the largest non-state owned automobile retailer in Beijing, Lentuo International Inc. (NYSE: LAS), has pulled back to support, providing an excellent entry point for investors that missed out previously.
How good is the opportunity at these levels? Considering the Company has a net cash position of $83.2 million and a market cap of only $133.6 million as of the writing of this post, the opportunity is significant. Rarely will you find the opportunity to buy shares in a Big Board company, with a Big Four auditor, at these types of prices. Just look at the peers of LAS: CarMax, Inc. (NYSE: KMX), AutoNation, Inc. (NYSE: AN), Penske Automotive Group, Inc. (NYSE: PAG) and America’s Car-Mart, Inc. (NASDAQ: CRMT), none of which have positive net cash positions; in fact, each of these companies has a substantial negative net cash position, yet they are all trading for double-digit P/E multiples.
Why is a positive net cash position important? If a company is trading at a positive net cash position, it means that you are essentially purchasing the actual business of the company for a much lower price. For example, in the case of LAS, you are basically purchasing the Company’s business for $50.4 million right now (subtracting the net cash from the current market cap). That’s right; a business that did $24.5 million in net income in the last fiscal year can ultimately be purchased today for $50.4 million.
Additionally, a company with a positive net cash position has more funds available to expand its business without the need to dilute shareholders or add debt. This means LAS is well positioned to execute on its aggressive growth strategy for the fiscal year.
The Company, in its first quarter earnings release, just disclosed the completion of a brand new FAW-VW dealership in Beijing that will begin to contribute revenues this week. This is the first of three greenfield, or brand-new construction from the ground up, dealerships that LAS intends to add to its network in the current fiscal year. In addition to these projects, LAS also has seven planned acquisition targets of existing mid-line and luxury brand dealerships, the first of which, a leading Honda dealership in the fast-growing lucrative market of Tianjin, the Company anticipates closing in the coming weeks.
So we have an NYSE-listed company, with a Big Four auditor, leading its industry in the fastest-growing market in the world, trading for a steep discount to its peer group, which can be bought for essentially 2x its trailing earnings when factoring in its net cash position. Investors should consider themselves lucky to have a second chance to get this stock at these ridiculously low levels.
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