Auto Trader looking to move up a gear

SHARES in used car website Auto Trader fell 5 per cent after the release of its 2016/17 results.

Operating profit in the 12 months to March 31, 2017 was £203.1million, up 18 per cent on the previous year. The increase was driven by a 9 per cent increase in revenue, to £311million, and a 6 percentage point rise in operating margins, to 67 per cent.

The group also declared a higher final dividend, bringing the total for the year to 5.2p per share, up from 1.5p last year. It wasn’t all so rosy, however. The UK’s car market has been buoyant in recent years, but new car registrations are down slightly so far this year.

Auto Trader chief executive Trevor Mather points out that the used car market is likely to remain robust for a while yet, but historically weakness in new car sales still feeds through to the second-hand market after a couple of years.

Heightened political uncertainty following a less than decisive election result could also have knock-on effects. Nonetheless, Auto Trader retains some enviable characteristics.

The way we go about buying our next car has changed in recent years. Rather than trekking from dealer to dealer to try to find a suitable purchase, we are now much more likely to conduct our research online before going to the dealership specifically to complete the deal.

This makes websites like Auto Trader’s invaluable to sellers, since they provide such an important means of connecting dealers to potential buyers. Given Auto Trader generates four times the traffic of its nearest competitor, it’s easy to see why maintaining a spot on the site is all but essential to dealers.

This gives it the power to put through price increases year-on-year. In the past three years, the group has managed to squeeze 30 per cent more revenue out of a stable bank of customers.

Running a successful website doesn’t require much in the way of capital outlay, and so the group generates plenty of surplus cash.

All in all, Auto Trader’s business model looks strong to us. However, the group is sensitive to wider economic conditions.

“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”