Here’s why this small-cap’s share price rise has stalled today

This small-cap’s shares have raced ahead since the end of last year. So what’s behind today’s big fall?

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The share price of the UK’s largest car retailer Motorpoint (LSE: MOTR) fell heavily in trading this morning, despite the company announcing a positive, analyst-expectation-beating set of full-year numbers to the market. Is this a signal that the shares have run out of gas or merely a blip before resuming their onward charge? Let’s check those numbers.

Motoring ahead

Revenue popped 20.6% to £991.2m as the company attracted record levels of repeat customers to its sites — increasing to 26.2% from 25% the year before. Given that people tend to change cars irregularly, that’s rather impressive. The fact that more appear to be opting for nearly-new over new cars also helped pre-tax profit rise just under 71% to £20m over the year to the end of March.

So, why the big fall? A lot of it could be due to a downgrade from broker Numis from ‘Buy’ to ‘Add’. While remaining positive on the stock, the broker stated that the shares have had a great run having climbed 75% in value in just 12 months. Based on adjusted basic earnings per share of 16.8p (up 32.3% from the previous year), Motorpoint’s shares were valued at a trailing price-to-earnings (P/E) of 15.5 before today. That’s high relative to industry peers.

Another reason could be management’s cautious — but actually eminently sensible — comments on the small-cap’s outlook. Despite being focused on expansion and gaining market share (Motorpoint opened its 12th site in April last year), CEO Mark Carpenter highlighted the company’s desire to remain “mindful of the wider economic and political climate“. With Brexit on the horizon, that’s no bad thing.

While the upside may be more limited going forward, it’s hard to deny that the firm looks in rude health. The company boasts consistently decent returns on the money its invests, even if margins in this sort of business are naturally rather low. Cash flow more than doubled in the last year from £7.4m to £20.2m. And while this year’s total dividend of 6.6p equates to a fairly average trailing yield of 2.7% (taking into account today’s share price fall) — the 57% rise on 2016/17’s payout is certainly indicative of a company reaching for a higher gear.

A less risky alternative?

Given the level of competition in the industry, those put off by relatively frothy valuations in some car retailers may prefer to invest in automotive marketplace Auto Trader (LSE: AUTO).

Shares in the £4bn cap FTSE 250 constituent have been on sparkling form over the last few days after the company announced a reassuring set of numbers to the market. In brief, revenue moved 7% higher to £330.1m in the 12 months to the end of March with pre-tax profit climbing 10% to £210.8m.

These positive figures were largely the result of retailers and manufacturers taking advantage of new products launched by the Manchester-based business in the last year. Its Dealer Finance product, for example, is proving popular and 69% of those eligible are electing to pay for it.

While the aforementioned economic uncertainty is likely to continue impacting on the number of private listings on the company’s site, trading in the new financial year appears fine, with the company stating that it was “confident of meeting its growth expectations for the year“.

Taking into account its huge market share, declining debt levels and sky-high returns on sales, Autotrader still looks worthy of investment at 21 times earnings. 

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 considered so you should consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader. 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.

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