How Anglo American plc could help you retire with a million

Anglo American plc (LON:AAL) is generating a lot of spare cash.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing in companies with the ability to generate a lot of surplus cash can be a good strategy for beating the market. Today I’m going to look at two such firms.

Motoring ahead

Car dealership group Marshall Motor Holdings (LSE: MMH) rose by 7% on Tuesday morning, after the company’s half-year results came in ahead of analysts’ forecasts.

Although the board emphasised its “cautious” outlook for the car market, the group’s underlying pre-tax profit rose by 32.9% to £18.6m during the period. Shareholders were rewarded with a 19.4% increase in the interim dividend, which rose to 2.15p.

These figures were flattered by last year’s acquisition of rival Ridgeway. But even excluding this, like-for-like revenue rose by 6.7%.

Strong asset backing

Car dealership groups often rely on debt financing to purchase vehicles. Marshall is no exception, but the group’s adjusted net debt of £35.1m seems comfortable when set against trailing 12-month net profit of £23.2m.

The company also owns a portfolio of freehold and long leasehold property worth £112.5m, providing solid asset backing for this debt.

What could go wrong?

New cars carry very thin profit margins. Dealers make most of their profit from used cars and after-sales. One risk for investors is that the value of used cars will collapse. This could crush profits from leasing and used car sales.

In Tuesday’s results, management reported “margin pressure” on used car sales and “lower levels of disposal unit profitability” in its leasing business. To me, this suggests that used car values are falling, albeit slowly.

Too cheap to ignore?

This sector of the market is modestly valued. But even so, Marshall shares stand out for being unusually cheap. At the last-seen share price of 152p, the company’s stock trades on a 2017 forecast P/E of about 5.5, with a prospective yield of 4.1%.

In my view, this low valuation discounts quite a lot of risk. I believe the shares could be worth a closer look.

A mountain of cash

Global mining group Anglo American (LSE: AAL) has made a stunning comeback over the last year. But the firm’s shares still look very affordable to me.

Cash generation has rocketed and net debt has fallen by almost half to $6.2bn over the last year. As a result, Anglo has said it will resume dividend payments. A full-year payout of $0.76 per share is expected for 2017, giving a prospective yield of 4.7%.

Looking back over the last 12 months, Anglo stock now trades on a trailing P/E of 7 and a trailing price/free cash flow ratio of 5.2. Both figures seem very cheap to me.

However, analysts expect profits at all of the big miners to be lower in 2018 than in 2017. For Anglo, the forecast is for a 24% fall in earnings to $1.60 per share. That sounds quite drastic, but it still leaves the stock on a 2018 forecast P/E of 10, with a potential yield of 3.9%. These forecasts are also likely to change. Broker profit forecasts for 2018 rose by 7% last month. They could easily rise (or fall) again.

My view is that Anglo American’s modest valuation and strong cash generation could make the group a bid target. Even without this, the shares look good value to me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Anglo American. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »