Auto Trader shares: is it the right time to buy?

The UK car market was facing headwinds even before Covid-19. Royston Roche takes a deeper look into Auto Trader shares to better understand the impact.

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Auto Trader (LSE: AUTO) shares have risen just 0.60% over the past year at the time of the writing. However, investors who bought the stock in April have a better return of approximately 45%.

Auto Trader shares’ fundamentals

The company’s revenues have been growing at a compounded annual growth rate of 7.0% from the year 2016 to 2020. The company’s net profits have also grown from £126.7m in the fiscal year 2016 to £205.1m in the fiscal year 2020.

Revenue in the first half of the fiscal year 2021 was down 37% to £118.2m. This was primarily due to the company’s decision to allow its retailer customers to advertise on its marketplace for free during the lockdown months, which led to the trade revenue dropping 38% to £100.2m. Net profits fell 92% year-on-year to £53.8m. Since the company’s operating expenses are very low, it has a good net profit margin of 46%.

The average revenue per retailer per month fell 38% year-on-year to £1,206. The company had a physical car stock average of 478,000 cars (that are advertised on the website) in the first half of 2021. It included 46,000 new cars (the new car segment was started by the company in 2019).

The company raised £182.9m in equity proceeds in April 2020 and net debt was reduced to £58.1m, as of September 30, 2020.

General car market

The UK has been one of the important markets for car manufacturers. However, in the last few years, the industry is facing a lot of uncertainties due to Brexit, technological changes, and now Covid-19.

Car dealerships are not allowed to open in the latest tighter restrictions, which came into force on January 5th across the UK. However, the good news is that customers might be still able to buy a car remotely from a dealer offering click-and-collect or home-delivery services.

Auto Trader’s purpose as mentioned in its annual reports is to improve car buying in the UK, whilst also evolving the wider automotive ecosystem. The company’s mission is to lead the future of the UK’s digital automotive marketplace.

I personally believe that Auto Trader is the first choice for most of the second car buyers in the UK. The site is very user friendly and it has got most of the information you need to buy a car. The price comparison is another feature that saves you time and energy in comparing cars with various combinations.

I believe there are a couple of risks that I need to keep an eye on. The company might lose money in the near-term since its providing free advertising to customers during the lockdown. Various online market places are also making inroads, which might put a dent in Auto Trader’s revenues in the long-term.

In conclusion, the company has a good brand image, decent revenue growth and good operating cash flows. However, Auto Trader shares trade at a price-to-earnings ratio of 34.51 and a price-to-sales ratio of 18.20, which looks too expensive for me to consider buying the shares right now. Instead, I’ll watch and wait for the share price to come down and offer an attractive buying opportunity when they’re better value. which I believe is not very cheap for me to buy the shares at the moment.

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.

Royston Roche 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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