AB Dynamics is a company in the business of testing cars. This includes vehicle suspension, brakes, and it has global operations. It also helps to evaluate safety systems, and works with many OEMs. It came to the market in 2013 at a price of 86p per share, and has been a rare AIM company that has built shareholder value rather than destroyed it.
Background
It’s a relatively boring and unexciting business. It doesn’t mine or drill for anything, or have fancy technology that gets punters salivating. However, the returns from this stock have been anything but. Shareholders who have been holding since IPO are now well over 20x their money up. Perhaps Peter Lynch was right when he said that boring stocks in boring industries were sometimes the most exciting stocks to own.
Is the business expensive?
One of the common themes and qualms about stocks with high PE ratios is that investors tend to think that they’re expensive. Of course, one can only say it’s expensive when we compare it to what we’re actually paying for. Therefore, I find the PEG ratio is a much better indicator of the true price of a business. We wouldn’t say a £50,000 car is cheaper than a £60,000 car as the former may be a clapped-out Vauxhall Cavalier and the latter a lovely Ferrari 458. It’s obvious where the true value is in that choice. PE ratio is limited.
Earlier in 2019, I had been wondering if ABDP had been getting ready to build a stage three base. If I recall, it was also on 40x earns or something similar (please correct me if I’m wrong in the comments). There was plenty of director selling, but then the company released this RNS.
“Profit before tax (excluding share option costs) increased 95% to £6.4m”
“Basic EPS increased 130% to 28.36p (H1 2018: 12.35p); Diluted EPS increased 130% to 27.61p (H1 2018: 12.03p)”
From this update, it was very clear that the company was in fact cheap. It could’ve been rated on a PE of 60 yet the growth was far outstripping the price that people were paying for its earnings.
The price responded in earnest, zooming from an open of just above 1900p to just over 2700p – a nice increase of around 40% in just a few…
