Car market gets set for a speedy recovery.

The war in the Gulf may have dominated the headlines in recent weeks, but for motor dealerships it has had a less dramatic effect on sales than last year's double whammy of the Jubilee and the World Cup.

While the last two years have been a great time to be a first-time car buyer, as the prices of both new and used cars have dropped significantly, this has presented an interesting challenge for motor retailers. The instant reaction is that it can't be good for UK car dealerships, but this is not necessarily the case.

The perception that cars in the UK are now `better value' has lessened the pressure coming from European imports and encouraged more prospective purchasers on to the forecourt.

The North-East is home to the UK's largest retailer of cars. With over 70 dealerships across the country, Sunderland based Reg Vardy plc* is a familiar name to millions of people throughout the UK.

Whilst it retains strong links with its home city and core North-East market, the group has a commitment to balanced representation of both volume and specialist marques across a number of geographical areas.

In addition to the North-East, it also has a strong presence in the east and west of Scotland, Yorkshire, the Midlands and the South-East.

Its experienced management team is also well respected both by people throughout the sector and within the investment community.

Headed by chief executive and founder Sir Peter Vardy, who retains a sizeable personal stake in the business, this is one of the key reasons behind its undoubted popularity with institutional investors.

Reg Vardy is currently outperforming its peer group, having benefited from a recent refocusing of its efforts on one of its strongest areas, namely retailing large numbers of volume cars such as Ford and Vauxhall. This is popular with institutional investors, as used car sales, when combined with additional services, now provide better margins than new car sales.

With its strong balance sheet, the group, which is looking forward to a strong second half of 2003, is looking at a number of complimentary bolt on acquisitions in the coming months.

This will put it firmly on line to meet its medium-term target of 100 dealerships across the country by the end of 2005. The threats in the sector, which are led by increasing competition from manufacturers selling their products themselves and `new' retailers such as banks, are unlikely to seriously threaten the firm's position as it is held in high regard by the manufacturers.

The key to Reg Vardy's future success will be managing its growth as it seeks to move to 100 dealerships and increase pre-tax profit from circa pounds 35m up towards the pounds 50m barrier.

European Motor Holdings is another listed motor retailer behind some familiar dealership names in the region, including Mill BMW and Mill Volvo, and has also had a strong 12 months.

With its excellent spread of specialist dealerships, it too is outperforming most of its peer group.

With continued low interest rates and a strong product offering, EMH's motor division looks set to go from strength to strength. Wilcomatic, its car wash division, has scope to grow from its low base if trials prove successful, and there is a full roll out planned across the UK.

There is little doubt that the stock market as a whole has been looking forward to a short sharp war and while that may have been achieved, the winning of peace looks more difficult.

Therefore, it may be a little time before the stock market picks up substantially. When it does however, it will be firms like Reg Vardy that are in the best position to lead the recovery and benefit from investors' renewed confidence.

New Block Exemption rules come into force in October this year, which should benefit the larger, quality players like Vardy who, amongst other things, will benefit from more secure and longer term franchise arrangements and be able to get `fleet equivalent' discounts on cars bought in bulk.

Motor retailers have been through a traumatic 24 months, with a buyer's strike in 2001 followed by a pick up in demand last year as car prices found their level.

The sector looks well placed to attract institutional investors back as we move towards the new Block Exemption rules and, hopefully, as confidence returns to the stock market over the coming months.

* Brewin Dolphin Securities (BDS) is broker to Reg Vardy and European Motor Holdings and may hold positions in these and other companies mentioned. The views expressed are not necessarily held throughout the Brewin Dolphin Group. Brewin Dolphin Securities Limited is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange. All figures are from public sources.