Reporting “record growth from both new and existing retailer products”, revenue rose 7% to £176.8m in the six months to the end of September with the average revenue per retailer forecourt (ARPR) outperforming management’s own expectations — rising 9% to £1,826. As a result, growth for the full year is now “likely to exceed previous guidance”.

Operating profit rose 10% to £120.6m with a small uptick in margin. Positively, Auto Trader’s balance also sheet continues to strengthen with a further reduction in net debt to £319.4m  from 336.5m at the end of the last financial year.

CEO Trevor Mather reflected on what had been “a great first half of the year” which also saw the company “strengthen its market-leading position“. Cross-platform visits were “nearly four times larger” compared to the £4.1bn cap’s nearest competitor with users spending an average of 585 million minutes a month on its site. 

So, the shares are worth buying?

As with all listed companies, there are things to like and dislike about Auto Trader as an investor. 

Beyond having an established brand, its relatively low-cost business model means that it can generate excellent returns on the capital it invests. With the Brexit deadline approaching, I also like the fact that most of its listings are for used cars, which are more likely to be attractive to drivers in the event of an economic wobble. Interestingly, the company stated today that it did not believe our EU departure would affect its ability to provide its services or “materially change” its cost base.

On the downside, the fact that it operates online means that the business trades on a far higher earnings multiple (22 times before this morning) compared to traditional car dealerships. As we’ve recently seen, highly-rated growth stocks are often the hardest hit in a general market sell-off. There’s also the threat of increased competition as a result of marketplace giant eBay’s recently-announced purchase of Motors.co.uk, assuming the deal is given the green light by the Competition and Markets Authority. 

Assuming Auto Trader doesn’t rest on its laurels and tackles the problem of increasing competition head-on (the recently announced joint venture with Cox Automotive UK Limited to develop a marketplace for wholesale vehicles is a positive step), I think the shares could still be worth buying.  

And I think its shares could continue to rise as others in its position have done, even if they have also seen short-term reverses. Take a look at Rightmove (LSE: RMV). Despite the arrival of competitors such as Zoopla and OnTheMarket, the large-cap remains the number one destination for those looking for a new house or flat, with 1.2m UK residential properties listed.

Like Auto Trader, the property portal’s online-only model allows its to make astonishingly high returns relative to the cash it puts to work. Incidentally, Rightmove stock is still 15% off the all-time highs achieved in June, shortly before it reported a 10% rise in revenue and 11% rise in operating profit, leaving it changing hands for 25 times earnings. That’s still punchy but, if you believe that a (positive) resolution to Brexit could see an increase in activity in the housing market, the shares may be worth checking out. 

The post Here’s why this FTSE 250 growth stock is motoring today appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Will today’s full-year results lead to a decisive swing in investor sentiment? Let’s check the numbers.

Racing ahead?

At first sight, all looks well. Revenue climbed 9% to £311.4m for the year to the end of March with operating profits rising 18% to just over £203m. At £193.4m, pre-tax profits came in 23% higher than in 2016 with cash generated from operations racing ahead 18% to a smidgen under £213m. So far, so good. 

Auto Trader’s biggest issue traditionally — its significant debt pile — also looks to be improving. Today the company reported that net external debt had dropped £37.6m over the last year to stand at £355m. A step in the right direction, to be sure. 

On an operational level, the £4.2bn cap revealed that cross-platform visits had climbed 16% to 55m per month. Over 2016/17, the company also introduced a number of new products to its site in an effort to improve trust and transparency between consumers, retailers and manufacturers. These included dealer reviews, basic vehicle checks, video adverts and a price indicator product. 

A final dividend of 3.5p per share was proposed, bringing the full dividend for the year to 5.2p — a rise of almost 250% on 2016’s payout (1.5p). Although not the sort of share to usually attract income chasers, this kind of hike is nevertheless indicative of a healthy company and confident management.

With such positive news, you would expect investors to be clamouring for the shares as markets opened.  Not so. The stock is down over 5% as I type. What gives? 

Much of today’s dip may be due to CEO Trevor Mather’s cautious comments regarding the industry’s short-term future. Despite saying trading in the new financial year “started well“, he went on to reflect how the industry expects the number of new car registrations to “plateau or decline” after years of uninterrupted growth, even if used car transaction volumes should continue to grow. With investors also becoming increasingly nervous of a general market pullback, perhaps today’s dip isn’t all that surprising.

Right now, stock in Auto Trader trades at around 25 times forecast earnings. That’s certainly not cheap. Is it worth it?  

I’m inclined to say it probably is. After all, it possesses many of the qualities that have served online property portal Rightmove so well over the years. Market-leading status? Check. Some 80% of UK retailers now advertise on Auto Trader’s site, which receives more than four times as many visits as its nearest competitor. Solid returns on capital? Check. High operating margins? Check. Great free cashflow. Check again.

Should the economy wobble as Brexit negotiations progress (regardless of who is entrusted with leading them), history suggests that the used car market should remain fairly resilient. People will still buy cars in the same way that people will continue to move home, even during difficult times.  

In sum, Auto Trader might not rocket any time soon but — in my opinion — remains a quality company and one worthy of consideration by those investing for the medium-to-long term. 

The post Is Auto Trader Group plc about to stall? appeared first on The Twelfth Magpie.

More reading

• Is the FTSE 100 at risk from an overheated US stock market?

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Auto Trader and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.