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.
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’.
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.