Interactive Investor

Auto Trader stock racing toward record high

10th June 2021 08:42

Richard Hunter from interactive investor

Shares in the online car dealer recovered rapidly from the pandemic crash, and even cautious investors may now be having a rethink.

With the pandemic pain in the rear view mirror, Auto Trader (LSE:AUTO) is well placed to benefit from a return to normality.

With car showrooms being shut for large periods of the reporting year, the company provided free or reduced advertising over several months to stimulate demand, with an inevitable effect on revenues. For their part, retailers also redesigned their business models, largely introducing the likes of “click and collect” and home delivery.

In addition, Auto Trader has launched a “Market Extension” product, on the basis that buyers are now willing to travel further distances to collect a car and that sellers are now able to advertise outside their immediate locality. Visits to the site also increased by 15% in the period, further underlining Auto Trader’s dominant position in its sector.

Alongside strong demand arising from customers now putting more value on their own exclusive use of a vehicle as opposed to using public transport, and the well-reported increase in the levels of personal savings during the pandemic, these factors in aggregate bode well for prospects.

This in turn has been reflected in management confidence in the outlook, not only increasing the dividend payment but also committing shortly to reintroduce the share buyback programme.

Inevitably, these annual results encapsulate the restrictions which the pandemic brought, with revenues down by 29%, operating profit by 38% and pre-tax profit by 37%, although each of these numbers are better than expected. At the same time, costs were also reduced by 8%, largely due to the decision to reduce discretionary marketing spend, while the additional fund raising exercise added £183 million to the coffers, bolstering the financial position, where the company reported net cash of £16 million at year end.

With March traditionally being the busiest month of the year for new car registrations, the company has now missed out on two opportunities through factors beyond its control. Even so, the number of new cars on its site grew by 52% over the period, providing a complementary service to the used car market, despite the current semiconductor shortages which are affecting the industry as a whole.

In terms of outlook, the company is looking to resume trading in line with the levels it was enjoying pre-pandemic, although it remains cautious that any further lockdowns would materially impact on its recovery.

Investors have chosen to err on the side of caution despite Auto Traders’ best efforts during the reporting period to 31 March. The share price had risen by 7% over the last year, as compared to an increase of 12% for the wider FTSE 100 index prior to this release, and the spike in opening trade today may reflect a reset in investor thinking. Indeed, the market consensus of the shares as a 'buy' is reflective of an improvement in prospects arising from Auto Trader’s cost efficient and powerful pricing model.

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