AutoTrader is soon to be one of only two technology companies left among the FTSE 100 if the takeover of software giant Aveva clears. Yet investors haven’t awarded the online car marketplace any great scarcity value.
A shift away from stocks priced for high future growth and fears of a slowdown in consumer spending and tightening in the motor retailer’s advertising budgets have pushed the shares down by more than a fifth in price since the start of this year. The online car marketplace has managed to keep squeezing more out of retailers, which during the six months to the end of September pushed revenue 16 per cent ahead of the same period last year.
A share price of just under 20 times forecast earnings might not look cheap, but it is at the bottom end of the range recorded since the group’s IPO in 2015. That could make AutoTrader the next tech name to be taken out by a private buyer.
AutoTrader is to car retailers what Rightmove is to estate agents. The online marketplace generates more than 80 per cent of its revenue through its classifieds business, where trade sellers advertise their vehicles to motorists. The group doesn’t make money on the value of the transaction, but is dependent on the volumes of cars on its website and selling higher-value ad packages that include more prominent positioning or access to pricing data.
The business is capital light and save for cash spent on a 900-strong workforce, much of the revenue generated on the platform drops through to the bottom line. The result? The group is highly cash generative and has enviable operating margins, which typically stand north of 70 per cent.
A dominant market position means those margins are defendable and a high proportion of revenue is recurring — almost 90 per cent during the first half. But then again, it also means attracting more retailers to the advertising platform is a less viable avenue for growth. The forecourts are also consolidating. That puts greater pressure on AutoTrader to get more out of existing retailers, a feat it has so far managed.
Annual price rises and selling additional advertising services pushed average revenue per retailer up 9 per cent during the six months to the end of September. Nathan Coe, AutoTrader’s chief executive, reckons the group can grow that metric faster during the second half of the financial year. Selling the Irish advertising business Webzone last month, which generated lower revenue per retailer on its platform, will provide a natural lift.
But that still leaves earnings next year at greater risk of a downturn in spending by car retailers. How easy will it be to convince forecourt traders, facing higher energy and wage bills themselves, to pay for higher-priced advertising packages if consumers put off upgrading their car? At least thus far, there has been no increase in churn and the number of retailers on the platform was 2 per cent higher in the first half of the year.
Supply of new cars, which has then curtailed used-car stock levels, is another challenge. Car retailers buy advertising packages based upon the number of vehicles they want to display on the Auto Trader site. New car volumes are substantially lower than last year, but overall stock on the site edged 1 per cent higher over the first half of the year.
But restricted supply of new cars has also hindered progress for Autorama, the car leasing platform bought by AutoTrader in June, which now expects to report a loss of £11 million this year. That’s worse than the £5 million to £7 million loss initially anticipated. A target for the company to break even by 2025 remains.
Analysts expect pre-tax profits to remain flat this year, taking into account the costs of the Autorama deal, but forecast a 12 per cent increase next year. Pushing forward revenue might be harder in the near-term, but convincing investors that the stock does not deserve such a harsh valuation, should not be.
ADVICE Buy
WHY The shares look too cheaply valued given the high margins and the long-term earnings potential
WH Smith
WH Smith is more a proxy for global travel activity than the fortunes of the British high street. The protracted recovery in rail and air passenger numbers has held back the shares from returning to pre-pandemic levels and dimmed the allure of potential rewards on offer from the retailer’s North American expansion.
Yet unlike most London-listed retail firms, the FTSE 250 member’s prospects look better than at this time last year. Station and airport branches made almost 70 per cent of WH Smith’s total profit over the 12 months to the end of March, reversing the previous year’s loss into a £63 million pre-tax profit.
On a like-for-like basis, travel revenues were 92 per cent of 2019 levels, rising to 96 per cent during the peak summer months — a time when caps on passengers at UK airports and lingering pandemic restrictions dampened traveller numbers. This time next year, management expects travel revenues to be ahead of pre-pandemic levels.
Consumer spending pressures aside, the high street business is stable but stagnant. An average lease length of less than two years has helped it regularly negotiate rent reductions of typically around 50 per cent at renewal. Seventeen of Smith’s 544 high street shops closed last year on top of 24 the year before.
Proving it can profitably expand in the vast US travel market would be a catalyst for the shares recovering. The plan is to open 125 new travel stores this financial year, 70 of them in the US. That will increase capital expenditure to £150 million, almost twice last’s spend, before falling back in 2024 to roughly £100 million.
Save for fresh travel restrictions, available liquidity is around £350 million, and the group is back to generating free cashflow from its operations. Roughly 70 per cent of a £296 million debt pile is fixed and the increase in finance costs this year should be lower than the £10 million rise recorded last year. Another benefit of growing the US business? A 10-cent appreciation in the dollar adds £3 million to the profit line.
US expansion comes with risk but also gives investors sight of higher potential returns, which is more than can be said for most of its peers.
ADVICE Hold
WHY Growing profits through US expansion could spur recovery in the shares
