The UK’s largest automotive market place provider – Auto Trader (LSE: AUTO) — released a cracking set of full-year results today (30 May) and the share price is up almost 12%.
The figures are impressive. For the trading year to 31 March, revenue rose 14% year on year, operating profit 26%, cash generated from operations 16%, and adjusted earnings per share 8%.
Such balanced growth is just how businesses should perform when they’re expanding, but often don’t. Sometimes we get earnings growth without the backing of cash flow or revenue, for example.
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The directors rewarded shareholders by increasing the total dividends for the year by just over 14% — nice!
Dominating its market
The firm has been consistent at raising the shareholder payment each year, apart from 2020 during the pandemic, which is forgivable. The multi-year compound annual growth rate for the dividend is running at just over 7%.
That’s important because it suggests the backing of a strong, successful and growing business. It can be wise to pay attention to directors’ dividend decisions. In this case, they’ve been positive about the trading and the outlook for the company’s operations.
The company has a grip on its sector in a similar way that Rightmove dominates the property market. Chief executive Nathan Coe said more than eight in 10 car buyers now use Auto Trader and two thirds only use the firm’s platform. Data and technology underpins the UK automotive industry. So, the firm innovates to help retailers achieve their business goals.
Looking ahead, Coe is “confident” in the firm’s prospects for the year ahead. Beyond that, the directors see “significant” opportunities to grow the company’s marketplace. One of the key aims is to move more of the car buying process to Auto Trader’s online platforms.
Meanwhile, City analysts have pencilled in an increase in normalised earnings of almost 15% for 2025. The dividend looks set to grow by nearly 14% too, adding to the long run of annual increases we’ve seen.
Challenged by its valuation
It seems that Auto Trader is firing on all cylinders, and it’s got a robust-looking balance sheet as well. But with so many positives, what’s the catch for investors considering the stock today?
Perhaps the main hurdle is the firm’s rich-looking valuation. With the share price near 811p, the forward-looking earnings multiple for 2025 is almost 26.
To me, that looks high compared to the earnings growth rate and it’s way above the FTSE 100’s rating of about 14.
Meanwhile, the anticipated dividend yield is about 1.3%, which compares to the Footsie’s roughly 3.3%.
This is what tends to happen when a growth story becomes long in the tooth. The market has priced in robust rates of expansion for earnings in the coming years. But if the company misses its estimates, any correction in the share price could be brutal.
Cyclicality in the sector or rising competitors may one day cause the firm to struggle, for example.
Nevertheless, Auto Trader is an ongoing UK success story right now. So, for my own portfolio, I’d be inclined to research further with the aim of considering at least a few of the shares. My aim would be to buy during bouts of market weakness, or any temporary setback for the stock or the business.
