Auto Trader, the online car marketplace, has been able to grow profits at a faster pace than sales for the past two years. It has grown into one of the most profitable businesses listed in London, with margins in its core business north of 70 per cent. It is little wonder that the FTSE 100 company is priced so highly by investors. The quality of its business model is certainly not in doubt — so the real question is, can it keep growing?
The company, which was born out of a trade magazine from the 1970s, is the largest online car marketplace. About 80 per cent of its sales come from car retailers, which include franchised dealerships, car supermarkets and independent sellers, by charging them for advertising space on its platform. It makes the rest of its sales from home traders, car manufacturers and a range of other consumer services, where it generates revenue from individuals who advertise their cars on the website.
The key appeal for investors is Auto Trader’s powerful network effect: the more retailers use the platform, the more valuable it becomes to consumers, which in turn leads to more retailers signing up. It is a very similar model to the online portal Rightmove in the property market, with both platforms now so embedded in their market that most sellers cannot afford to not use their websites.
As a digital platform, Auto Trader has a largely fixed cost base, which means it can scale its profits fast. The core business has an operating margin of 71 per cent, although this is diluted at a group level to 61 per cent because of its acquisition of the leasing business Autorama last year. Overall, the group has a free cashflow margin around 50 per cent, and an impressive return on invested capital of about 40 per cent.
The conundrum for investors is whether Auto Trader can keep growing. Sales rose by 14 per cent in its financial year ended in March, with operating profits up by more than a quarter to £348.7 million. Meanwhile, its average revenue per retailer increased by 12 per cent, which was led by an expansion in its products and services, as well as an annual pricing event in April.
Investors are eyeing its new “deal builder” product to help to drive growth. This will allow car buyers to value their part-exchange, apply for finance and reserve a car on Auto Trader. It is still in the trial phase, but there are already positive indicators of its ability to scale — there are about 1,100 retailers onboarded on the platform.
There are some concerns around how cyclical the business is. Both customers and retailers borrow against their vehicles, so the impact of higher interest rates can hurt its client base. That is not to mention the uncertainty around the future of the car market, especially as more manufacturers pursue both agency and direct-to-consumer models.
Auto Trader did note that the new car market has been “challenging”, but said that there had been particularly strong demand for second-hand cars, which so far has been supportive of sales. In fact, the company added that cars were selling faster than before the pandemic, and used car supply was also improving. This is also good news, given that the rise of agency and direct-to-consumer models also applies mostly to new cars, which is a smaller part of the business.
Auto Trader is a high-quality outfit, but it does not come cheap: the shares trade at almost 23.8 times forward earnings. This is slightly below its five-year average of 27.6 and at a similar level to Rightmove, which trades at a multiple of 20. Auto Trader shares also offer a dividend yield of 1.3 per cent, which is modest, but the company has a respectable track record of steadily increasing payouts, as well as share buybacks: it spent £170 million on repurchasing its stock this year.
Advice Buy
Why Market leader with strong fundamentals and promising avenues for growth
JP Morgan Global Growth and Income
JP Morgan Global Growth and Income’s official objective is to beat the global stock market over the long term. This is a tall order but, so far, the trust has delivered. In the past decade it has returned 308 per cent to investors, compared with 196 per cent from the MSCI All Country World index.
The investment trust has racked up a consistently impressive track record, beating the market on a five-year, three-year and one-year basis. It has done this via a bottom-up stock selection process, which means that it considers each company on an individual basis, regardless of the macroeconomic environment, its geography or sector.
The portfolio typically includes between 50 and 90 stocks, though its top 10 holdings, which include the likes of Microsoft, Amazon and Nvidia, accounted for 41 per cent of its assets as of the end of April. Its biggest allocation is in the technology sector, which made up 17.7 per cent of the portfolio, but it has a range of holdings across other sectors such as Mastercard and the American energy giant ExxonMobil.
A key attraction is the trust’s dividend policy: it sets a target dividend each financial year that is equivalent to at least 4 per cent of its net asset value at the end of its preceding financial year. Effectively, this means that if the trust’s assets increase in value, shareholder payouts will also rise. These dividends are paid out on a quarterly basis. The shares offered a prospective yield of 3.4 per cent as of the end of April.
JP Morgan Global Growth and Income is also one of the few investment trusts in London trading at a premium to its net asset value, at a modest 1.3 per cent, compared with an average 8 per cent discount. This reflects resilient demand for the shares, even during a weak period in the sector. The trust does not come with any performance fee and reports an ongoing charge of 0.5 per cent, which seems a fair exchange for a 137 year-old fund that has consistently proved it is worth the cost.
Advice Buy
Why Modest premium for a well-established growth fund
lauren.almeida@thetimes.co.uk
