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Here’s why this FTSE 250 growth stock is motoring today

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Shares in online vehicle marketplace Auto Trader (LSE: AUTO) raced ahead in early trading this morning following the publication of its latest set of interim numbers. 

Reporting “record growth from both new and existing retailer products”, revenue rose 7% to £176.8m in the six months to the end of September with the average revenue per retailer forecourt (ARPR) outperforming management’s own expectations — rising 9% to £1,826. As a result, growth for the full year is now “likely to exceed previous guidance”.

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Operating profit rose 10% to £120.6m with a small uptick in margin. Positively, Auto Trader’s balance also sheet continues to strengthen with a further reduction in net debt to £319.4m  from 336.5m at the end of the last financial year.

CEO Trevor Mather reflected on what had been “a great first half of the year” which also saw the company “strengthen its market-leading position“. Cross-platform visits were “nearly four times larger” compared to the £4.1bn cap’s nearest competitor with users spending an average of 585 million minutes a month on its site. 

So, the shares are worth buying?

As with all listed companies, there are things to like and dislike about Auto Trader as an investor. 

Beyond having an established brand, its relatively low-cost business model means that it can generate excellent returns on the capital it invests. With the Brexit deadline approaching, I also like the fact that most of its listings are for used cars, which are more likely to be attractive to drivers in the event of an economic wobble. Interestingly, the company stated today that it did not believe our EU departure would affect its ability to provide its services or “materially change” its cost base.

On the downside, the fact that it operates online means that the business trades on a far higher earnings multiple (22 times before this morning) compared to traditional car dealerships. As we’ve recently seen, highly-rated growth stocks are often the hardest hit in a general market sell-off. There’s also the threat of increased competition as a result of marketplace giant eBay’s recently-announced purchase of Motors.co.uk, assuming the deal is given the green light by the Competition and Markets Authority. 

Assuming Auto Trader doesn’t rest on its laurels and tackles the problem of increasing competition head-on (the recently announced joint venture with Cox Automotive UK Limited to develop a marketplace for wholesale vehicles is a positive step), I think the shares could still be worth buying.  

And I think its shares could continue to rise as others in its position have done, even if they have also seen short-term reverses. Take a look at Rightmove (LSE: RMV). Despite the arrival of competitors such as Zoopla and OnTheMarket, the large-cap remains the number one destination for those looking for a new house or flat, with 1.2m UK residential properties listed.

Like Auto Trader, the property portal’s online-only model allows its to make astonishingly high returns relative to the cash it puts to work. Incidentally, Rightmove stock is still 15% off the all-time highs achieved in June, shortly before it reported a 10% rise in revenue and 11% rise in operating profit, leaving it changing hands for 25 times earnings. That’s still punchy but, if you believe that a (positive) resolution to Brexit could see an increase in activity in the housing market, the shares may be worth checking out. 

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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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