Can AA plc Rescue Your Portfolio Or Should You Buy Auto Trader Group plc Instead?

Bilaal Mohamed examines the investment potential of AA plc (LON: AA) and Auto Trader plc (LON: AUTO). Which one comes out on top?

| 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.

Roadside assistance firm AA (LSE: AA) has had a bumpy ride over the past year. Its shares have fallen by almost 33% in the past 12 months raising the question of whether it’s a potential recovery play. Or if you want to rev up your portfolio, should you buy Auto Trader (LSE: AUTO) instead? 

Driving ahead

The AA is the UK’s largest breakdown cover organisation and one of the country’s best-known brands. But interim results for fiscal 2016 didn’t look good with a drop in revenue to £484.6m from £491.7m, and a pre-tax loss of £63.6m, compared to a £10.2m profit a year earlier. Earnings per share also fell, to 8.2p from 11.51p. Does the future look bleak for this instantly recognisable brand?

Executive Chairman Bob Mackenzie doesn’t think so and stayed upbeat about the company’s prospects, saying: “The AA has once again demonstrated its fundamental strength, stability and hugely cash-generative characteristics. We are confident that we are in line with expectations for the full year and that we will position the AA as the digital brand for all motorists’ needs.”

Bob Mackenzie is confident and City analysts seem to agree. So given that less than a year ago the shares were trading at 434.5p and can now be snapped up for 271p, it could be a good time time to grab a bargain.

Analysts expect earnings to slide by 10% to 20.84p for the year to 31 Jan 2016, but they’re looking for this to be followed by growth of 16% and 15% for 2017 and 2018, respectively. This represents a forecast P/E of 13 for FY2016, falling to 11 and 10 for the following two years. In addition, healthy dividend yields of 3.3%, 3.8% and 4.3% are forecast for the next three years.

Those analysts are clearly expecting a turnaround in fortunes and I think a forecast P/E of 10 for 2018 represents exceptional value. Bargain hunters may want to take a closer look at the shares as there’s significant upside potential given the earnings outlook. The generous dividends should keep income investors happy too!

High priced hotshot

Auto Trader is the UK’s largest digital automotive marketplace and sits at the heart of the country’s vehicle buying process. In recent months, shares have slumped from a high of 455p in December 2015 to current levels of around 380p. Consensus forecasts suggest a 195% rise in earnings to 12.17p for the year ending 31 March, followed by further growth of 17% and 15% in the following two years. Auto Trader currently trades on 31 times forecast earnings for this year, falling to 27 and 23 times for 2017 and 2018.

Brokers are optimistic about the company’s growth prospects with US investment bank Goldman Sachs recently reiterating its buy recommendation with a price target of 443p. However I think that at 23 times 2018 forecast earnings, the stock isn’t cheap and the shares could tumble if the ambitious growth figures aren’t realised. I would avoid the shares for the time being.

At present levels, the AA represents exceptional value and could be a good recovery play with the added bonus of generous dividends, while Auto Trader seems a little too risky for my liking. I think there are better opportunities for growth elsewhere.

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.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Auto Trader. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

£20,000 in savings? Here’s how I’d aim to turn that into passive income of £903 a month

Our writer shares one approach to passive income investing, spotlighting a quality FTSE 100 stock he recently added to his…

Read more »

Investing Articles

Great dividend stocks! Here’s the forecast for Associated British Food shares to 2027

Associated British Foods' shares have dropped in value this year. Does this present a dip-buying opportunity for dividend investors to…

Read more »

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »