Auto Trader Group (LSE:AUTO), the FTSE 100 online automotive marketplace, saw its share price increase by 16% during May. Most of this gain occurred on 30 May when its shares closed nearly 15% higher as investors digested the company’s results for the year ended 31 March (FY24).
I think it’s a stock that’s often overlooked. Despite Auto Trader being the 55th most valuable company on the index, in terms of the value of deals placed, it ranked 77th during the first four months of 2024.
And I think it’s fair to say that the company has proved some of its doubters wrong.
Not universally popular
In the middle of May, Morgan Stanley thought its shares were overvalued by approximately 25%. And it was fearful that Google’s entry into the UK market would represent a major threat. However, it did describe Auto Trader as “arguably the best-in-class car vertical operator in Europe”.
Two months earlier, JP Morgan Cazenove said: “We now see an increasingly challenging market backdrop coming to the fore – following six months of falling used car prices … and meaningful margin erosion for UK retailers — which we expect to temper consensus expectations on the core marketplace business.”
Financial performance
Despite these downbeat assessments, the company’s FY24 results showed a 14% increase in revenue, a 26% improvement in operating profit and a 13% rise in earnings per share, compared to FY23.
But one swallow doesn’t make a summer.
Having said that, the company does have an impressive track record of growth.
It first listed in 2015. Since then, with the exception of FY21 — when the pandemic caused havoc — the company has grown its earnings per share annually.
| Measure | FY16 | FY17 | FY18 | FY19 | FY20 | FY21 | FY22 | FY23 | FY24 |
|---|---|---|---|---|---|---|---|---|---|
| Revenue (£’000) | 282 | 311 | 330 | 355 | 369 | 263 | 433 | 500 | 571 |
| Adjusted earnings per share (pence) | 12.7 | 15.6 | 17.7 | 21.0 | 22.2 | 13.2 | 25.6 | 27.1 | 29.4 |
As well as its history of growing both its revenue and profits, there are other reasons that would make me consider investing.
Growth prospects
I like the sound of its ‘Deal Builder’ product, which is intended to enable buyers to value their existing car for part-exchange, apply for finance and reserve a replacement vehicle. It’s currently being trialled. However, 1,100 retailers have already signed-up.
Also, its website remains hugely popular with over 77m visits a month. It appears to be the go-to destination for secondhand car buyers in the UK.
In addition, between now and 2029, Mordor Intelligence reckons the UK used car market will see an average annual growth rate of 11.7%.
Risks
But the business does face its challenges.
Alphabet‘s Google Ads, which has already been launched in the US, Canada and Australia, will soon show UK vehicles for sale taken directly from the websites of dealers.
Personally, I’d rather use Auto Trader’s website than the Google platform. But the technology giant has been known to disrupt markets before. I think any business, no matter how large, would be nervous if Alphabet was a competitor.
Also, its dividend is paltry. With a yield of 1.2%, it’s well below the FTSE 100 average of 3.8%.
But my biggest concern is that its shares are expensive. They’re currently trading on nearly 28 times the company’s FY24 earnings. I’m not sure there’s much value left in its share price.
For comparison, Rightmove’s multiple is currently 21.
Given these risks, I don’t want to invest at the moment. I think there are other opportunities elsewhere currently offering better value.
