I’m eyeing up Auto Trader Group (LSE: AUTO) as a potential growth stock buy, after FY results smashed through market expectations.
The share price stormed ahead of the FTSE 100 on 30 May, spiking up 13% on the day.
The shares are up 35% in the past five years too. There’s not much in dividends, but I think that would be a fair performance even without a pandemic and a stock market crash.
Soaring profit
Auto Trader provides the UK’s biggest automotive marketplace, and its dominance showed.
Headline figures for the year to March 2024 included a 14% rise in revenue, with operating profit up 26%. It means-adjusted earnings per share (EPS) gained 8%. Cash flow is vital, and that looked good too — operating cash flow rose by 16%.
The dividend was lifted 14%, though it only means a yield of 1.3% on the previous day’s close price. But it’s growing well. And the firm also returned £250m through buybacks in the year just ended.
Auto Trader might not pay much in dividends right now. But a strongly progressive dividend policy can mean a lot in the years ahead.
Dividend policy
It’s the kind of thing that can turn growth stocks into cash cows, if it can keep going. And it sounds like that’s what the board intends.
The results statement said: “Our capital policy remains unchanged, with most surplus cash generated by the business being returned to shareholders through dividends and share buybacks.“
But should we really be thinking about dividends when we look at a possible growth stock buy?
I reckon it’s never too early. All growth stocks should mature some day, and settle down to provide steady cash rewards to shareholders.
And the ones I think have the best prospects of some day paying big dividends are the ones that will attract my growth investing cash.
Premium valuation
The biggest fear for me, though, comes from the stock’s high growth valuation. Well, high-ish, at least.
Forecasts put the price-to-earnings (P/E) ratio at 26 for the 2024-25 year, and it would only drop as far as 23 based on the 2026 outlook. Does that mean there might be too much earnings growth already built into today’s valuation?
There might be. Growth investors often don’t leave a lot of safety margin when they push prices up. And when a company like this does turn to slower maturity, we can see a short-term price fall.
Dominance
Still, Auto Trader’s market dominance does shine.
CEO Nathan Coe told us that “More than 8 in 10 car buyers now use Auto Trader during their car buying journey and two thirds of buyers only use Auto Trader“.
Very few companies can do more than dream about having such a commanding position.
So, balancing the potential for earnings growth with the current market valuation, what’s my verdict on Auto Trader? I reckon growth investors could be making a mistake if they don’t at least consider it.
