This is what I’d do with the shares of this top FTSE 100 growth company now

There’s a lot to indicate that this FTSE 100 (INDEXFTSE: UKX) firm’s business is a good quality one.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I last wrote about FTSE 100 online vehicle marketplace provider Auto Trader Group (LSE: AUTO) in April 2017 arguing that the firm is doing something in the vehicle sales market similar to what Rightmove is doing in the property sales sector.

Around 80% of UK automotive retailers advertise on autotrader.co.uk and the site gets roughly 55m visits a month, 70% of them from mobile devices. Some 450,000 cars are listed each day – the statistics are staggering.

A firm grip on the market

The company has a firm grip on the market making it hard for competitors. Would those selling cars risk advertising on competitor sites where potential buyers may not see the vehicles they have for sale? I think not.

Auto Trader’s strong position in the market has delivered an impressive financial record over the past few years with steadily rising revenue, earnings and cash flow. The return-on-capital figure runs above 60% as does the operating margin. There’s a lot to indicate that the business is a good quality one and the firm’s valuation reflects that.

When I wrote about the company in 2017, the share price stood at 410p and the forward-looking price-to-earnings (P/E) multiple was around 23. Although the share price did ease back a bit, it recovered and now sits close to 583p with the forward-looking P/E multiple at about 26 for the trading year to March 2020. It seems that the company has managed to keep its high-looking rating, which could be seen as a mark of quality.

Good figures

Today’s full-year results report reveals that things continue to go well. Revenue rose 8% compared to the year before, cash from operations lifted 13% and earning per share shot up 18%. The directors expressed confidence in the outlook by moving the total dividend for the year 14% higher.

City analysts following the firm expect a low double-digit increase in earnings for the current year and the company is confident it will meet expectations. However, I’m a bit nervous about the cyclicality inherent in the automotive industry. If we see a general economic downturn, it seems reasonable to expect both new and used car sales to reduce. But what’s unclear – at least to me – is whether people will stop paying for adverts to try to sell their vehicles. There is a chance that Auto Trader’s business could do well through general macroeconomic weakness.

However, the stakes are high with the firm’s current lofty valuation. And the share price has risen more than 30% this year already. I think that could be enough for the time being and we may be in for a period of share-price stagnation, which makes me inclined to take my time with the stock.

I think Auto Trader is a great business, but I would be looking for periods of share-price weakness, dips, and down-days to buy into the story. So I’ve got this one on ‘watch’.

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 assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share 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.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »