In the three years since Auto Trader (AUTO) joined the stockmarket in a £2.35 billion IPO, investors have grown used to a stop-start journey in which share price peaks have been followed by sharp descents.
Today, the shares were in the fast lane after the online vehicle marketplace impressed analysts with its annual results and soothed worries that market forecasts for the year ahead may have become too optimistic.
The key metric of average revenue per retailer (ARPR) forecourt was a particular focus after rising by £149 to £1,695 in the year to March 31. This figure was driven by broad growth across stock, price and product.
But with fewer cars for sale in the market, Auto Trader is forecasting a small decline in stock in 2019 that will cause ARPR growth to be below the rate seen this year. Barclays pointed out that the pre-results consensus was for ARPR to grow 6.9% in FY19, compared with the 9.6% seen this year.
Source: interactive investor Past performance is not a guide to future performance
They said: “There was a lot of nervousness from the buyside that consensus was too high. Their commentary suggests that product upsell is going well and the price rise (in April) has been in line with expectations.”
In today’s results, basic earnings per share rose 15% to 17.76p while cash generated from operations lifted £13.2 million to £226.1 million. CEO Trevor Mather said the improvement had been driven by strong adoption of new products, such as the ability to search for a car by monthly payment.
Barclays is overweight on the stock and said shares looked too cheap for the quality of the business model and the growth the company can still generate.
With a price target of 415p, they added: “In a year where used car volumes have been down 3% they look set to be able to deliver on consensus.”
Assuming the car market stays in recovery mode, Bank of America Merrill Lynch thinks that Auto Trader has the potential to return to close to double-digit ARPR growth by 2020.
The bank highlighted two structural reasons for this, with the ongoing shift in advertising from print to online and the growth in data-driven decision making.
They added: “Auto Trader’s market-leading position and strong track record on growth and innovation give us confidence that it is well placed to benefit from these themes.” Bank of America has a price target of 490p based on a projected price earnings multiple of 18.2x.
Its forecast 2019 dividend yield is 1.93%, with Auto Trader having just returned a total of £148.4 million to shareholders through £96.2 million of share buy-backs and a 5.9p total dividend. This was up from 5.2p a year earlier.
The company has pledged to return around one third of net income to shareholders in dividends, with surplus cash used to continue its share buy-back programme and to reduce debt.
Bank of America thinks Auto Trader will have room to pay a dividend of 6.8p in the current financial year, compared with the earlier 6.5p consensus.
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