Since bottoming out at $2.90 on March 25, shares in ASX automotive retailer AP Eagers Ltd (ASX: APE) have almost doubled in price in recent weeks and are now back up to $5.43 as at the time of writing. With sales slumping during the coronavirus lockdowns, new investors have responded positively to the raft of cost-cutting measures the company has put in place to see it through the crisis.
Towards the end of April, AP Eagers announced that it had made the difficult decision to cut around 1,200 employees from its workforce at a saving of around $6 million a month. Those at the top of the company will be feeling the pinch as well, with non-executive directors foregoing their director fees and senior executives taking a 50% pay cut. AP Eagers has also been working with its landlords, suppliers and other key stakeholders to defer lease commitments and other payments. It has also frozen all non-essential capital expenditure.
The company's balance sheet remains strong, with $270 million worth of cash and undrawn debt facilities still at its disposal. Additionally, the company's suppliers have provided it with $122 million worth of working capital facilities.
Finally, it's also worth noting that the sale of the company's refrigerated logistics business to private equity firm Anchorage Capital Partners is still progressing. However, AP Eagers has now had to settle on a $75 million sale price instead of the originally agreed $100 million due to the negative economic impacts from the coronavirus.
Shares in ASX digital car classifieds business Carsales.com Ltd (ASX: CAR) have also performed well recently, up almost 40% from their 23 March low of $10.47 to $14.27 as at the time of writing. In its most recent COVID-19 update, released to the market on 23 April, it announced a similar range of cost-cutting measures that it hoped would see it through the crisis.
As with AP Eagers, Carsales has decreased the size of its workforce, temporarily standing down around 250 mostly frontline staff. Board and executive remuneration for the remainder of the financial year have also been slashed by 20%.
Interestingly, Carsales noted that traffic to its website had remained high throughout the pandemic, despite lead volumes dropping by 25% in April. The international arms of its operations have seen varying impacts from COVID-19: while the Brazilian geography has suffered in recent weeks after escalating outbreaks in that country, revenues in South Korea have continued to grow.
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Should you invest?
Even in an economic downturn, people will still have a need for cars and other vehicles. This doesn't exactly make AP Eagers or Carsales defensive plays, but both should continue to generate revenue even in a prolonged period of economic recession. After all, the AP Eagers company has a history dating back over 100 years.
However, there may still be a shift in demand away from luxury brands and towards cheaper used cars. If this occurs, it could theoretically present a greater rebound opportunity for online classifieds business, Carsales. Consumers may be less inclined to visit dealerships and may instead choose to buy their cars directly from the seller online.
Not only that, but as Carsales is now an internationally diversified company with operations in both Brazil and South Korea, these global revenue streams could also help to keep the company afloat during these uncertain economic times. And with its shares trading almost 25% below their pre-coronavirus highs, Carsales may still offer good value to new long-term investors.
