Monday 10 June 2019 11:06 amInteractive Investor Talk

Auto Trader bullish on growth prospects

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Amid fears of a slowdown in UK car sales, our head of markets talks us through the big numbers.

This sparkling set of annual results from Auto Trader (LSE:AUTO) is tainted only by a more guarded outlook from the company, implying that a repetition of the numbers is unlikely.

The majority of the metrics reflect Auto Trader’s powerful position within its sector, which in turn ratchets up the pressure on its competitors due to its pricing power. At the same time, the company is able to generate significant amounts of cash partly due to its cost-effective online nature, which has resulted in another increase to the dividend alongside the already supportive share buyback programme. 

With revenues up nearly 8% (including an impressive 9% jump on the important Average Revenue per Retailer Forecourt measure), pre-tax profit up 15% and operating profit margin standing at a whopping 69%, the company has clearly capitalised on its dominant position. 

The earnings per share figure has also risen 18%, and the joint venture with Cox Automotive in the form of the new “Dealer Auction” offering is showing early signs of promise.

Source: TradingView Past performance is not a guide to future performance

This unbridled success unfortunately leads to some question marks over the immediate future. In its own guidance, the company has highlighted that operating costs will increase, the income from the manufacturers’ side of the business will decrease and that generally new and used car sales are starting to show some signs of slowing. 

This may partly explain why the dividend was not increased by a rather larger sum, as the company prepares for more challenging times – the raising of the dividend adds to an existing paltry yield of 1% and, with the dividend being three times covered, there is clearly more room for manoeuvre if the company so wished.

As such, the stock is potentially at a crossroads. Looking in the rear-view mirror provides a pleasing view and the shares have responded accordingly, having risen 66% over the last year, as compared to a 6.4% decline for the wider FTSE 100 index. In the last six months alone, and following promotion to the premier index, they have added 41%. 

The outlook from here, however, is one which the company is attempting to manage down in terms of expectations, and the general view of the shares is that the price is up with events, with the market consensus currently standing at a ‘hold’, albeit a strong one.

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