When looking for a great company in the FTSE 100, I often look for one key characteristic.
If a firm can establish a significant moat around its operations that protects it from competition, I’m more likely to buy its shares. After all, I want my investments to be as protected as possible from threats.
I think Auto Trader (LSE:AUTO) offers this sense of security primarily because it has the best reputation of all online automotive marketplaces in the UK.
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The best way to buy a car
Customers love Auto Trader, so much so that the business has received a very high overall 4.7-star rating on Trustpilot. One customer even said he was able to make double his money by selling privately through Auto Trader rather than through a car dealership.
For a long time, the founder and ex-CEO of Rightmove has been the chairman of Auto Trader, but he’s now stepping down. The thing is, he’s guided the company to so much success that I reckon it can live on well without him at the helm. One thing is for certain in life: excellence often aggregates. I’m not surprised that Rightmove and Auto Trader are joined at the hip.
In my opinion, Auto Trader is the best way to buy a car in the UK. Why would I travel a long way to view a small selection of cars in a showroom when I can browse an infinite catalogue online? Plus, with higher costs of living at the moment, the used car market is likely to be evermore appealing. Auto Trader has powerfully positioned itself to capitalise on this.
A well-run business
However, a strong market position isn’t enough. Investors also need to know that the company is managed well financially. Thankfully, I think Auto Trader’s management does an impeccable job.
One of the litmus tests for this is taking a good look at the balance sheet. If the company has a lot of debt, it can spell trouble over the long term. In the case of Auto Trader, its debt is very minimal.
But also, Auto Trader is an internet company. Those businesses usually have very high margins because it’s actually not very expensive to run a website compared to a factory, showroom or race track. What’s hard for internet companies is getting the brand off the ground so customers keep on visiting the site. Auto Trader has proven it’s the top dog in the UK. Therefore, it’s reaping the rewards of high profitability now.
Nothing’s perfect
On the flip side, I think there’s some competition risk for Auto Trader that could affect its long-term growth prospects. The reason I say this is that for big companies like it to keep on growing, they often have to expand overseas. Most foreign markets already have their own dominant online car marketplace. For example, in the US, there’s Craigslist, Autotrader (same name, different company), and Cars.com.
Therefore, I think the Auto Trader in question today is going to deliver slower growth than some investors might like.
Put it this way: it won’t be the next Nvidia. But it could be a healthy and stable stalwart for my portfolio. I think its valuation is reasonable, and it could develop its dividend payouts to compensate. It’s firmly on my watchlist!
