The bank issued a research note in which it went to ‘overweight’ from ‘underweight’ without passing “Go” or bothering with a spell with a neutral rating.
READ: Inchcape shares in reverse gear after broker starts coverage of car retailer with a negative call
It has not taken long for the British bank to change its view; it initiated coverage at the beginning of February with a slightly bearish note and that has proven to be the right call, with the shares falling from 724p at the end of January to 586p last night; the shares were up 38p this morning after the Barclays double-upgrade.
“Inchcape now trades much below what we calculate to be its intrinsic value,” Barclays asserted.
During the bull cycle, investors tend to think of Inchcape as a distributor, with a high return on invested capital (ROIC), low capital expenditure commitments and strong free cash flow, and accord the stock a high-earnings multiple.
“This was the cycle until July 2018. During the bearish cycle, investors tend to group Inchcape with cyclical and low-multiple auto OEMs [original equipment manufacturers]. This is the part of the cycle we are in now,” Barclays said.
“Even at our below-consensus and highly conservative numbers, we expect Inchcape to generate 14% ROIC and 17% ROE [return on equity], arguing for 1.7x P/B [price/book value] (vs. 1.3x currently),” Barclays said, as it explained the reasoning behind its 700p price target.
Inchcape has bought two businesses in the last couple of years but Barclays said it would now be better off using its war chest to buy back its own shares.
It thinks management can buy back shares worth £200mln a year and still keep net debt below annual underlying earnings (EBITDA).