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Is Auto Trader Group plc about to stall?

As investments go, online automotive marketplace Auto Trader (LSE: AUTO) has been somewhat frustrating of late. Stuck mostly around the 375p-400p range until only recently, the stock has been subject to a confusing array of upgrades and downgrades by brokers uncertain over the company’s prospects in the short term.

Will today’s full-year results lead to a decisive swing in investor sentiment? Let’s check the numbers.

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Racing ahead?

At first sight, all looks well. Revenue climbed 9% to £311.4m for the year to the end of March with operating profits rising 18% to just over £203m. At £193.4m, pre-tax profits came in 23% higher than in 2016 with cash generated from operations racing ahead 18% to a smidgen under £213m. So far, so good. 

Auto Trader’s biggest issue traditionally — its significant debt pile — also looks to be improving. Today the company reported that net external debt had dropped £37.6m over the last year to stand at £355m. A step in the right direction, to be sure. 

On an operational level, the £4.2bn cap revealed that cross-platform visits had climbed 16% to 55m per month. Over 2016/17, the company also introduced a number of new products to its site in an effort to improve trust and transparency between consumers, retailers and manufacturers. These included dealer reviews, basic vehicle checks, video adverts and a price indicator product. 

A final dividend of 3.5p per share was proposed, bringing the full dividend for the year to 5.2p — a rise of almost 250% on 2016’s payout (1.5p). Although not the sort of share to usually attract income chasers, this kind of hike is nevertheless indicative of a healthy company and confident management.

With such positive news, you would expect investors to be clamouring for the shares as markets opened.  Not so. The stock is down over 5% as I type. What gives? 

Much of today’s dip may be due to CEO Trevor Mather’s cautious comments regarding the industry’s short-term future. Despite saying trading in the new financial year “started well“, he went on to reflect how the industry expects the number of new car registrations to “plateau or decline” after years of uninterrupted growth, even if used car transaction volumes should continue to grow. With investors also becoming increasingly nervous of a general market pullback, perhaps today’s dip isn’t all that surprising.

Right now, stock in Auto Trader trades at around 25 times forecast earnings. That’s certainly not cheap. Is it worth it?  

I’m inclined to say it probably is. After all, it possesses many of the qualities that have served online property portal Rightmove so well over the years. Market-leading status? Check. Some 80% of UK retailers now advertise on Auto Trader’s site, which receives more than four times as many visits as its nearest competitor. Solid returns on capital? Check. High operating margins? Check. Great free cashflow. Check again.

Should the economy wobble as Brexit negotiations progress (regardless of who is entrusted with leading them), history suggests that the used car market should remain fairly resilient. People will still buy cars in the same way that people will continue to move home, even during difficult times.  

In sum, Auto Trader might not rocket any time soon but — in my opinion — remains a quality company and one worthy of consideration by those investing for the medium-to-long term. 

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