Auto Trader

[Topidiotboy]

Summary
Auto Trader Group Plc is the UK and Ireland’s largest online car market. It lists more than 450,000 cars and has 55 million cross platform visits each month. 80% of car dealers advertise on Auto Trader, and it has 4 times the consumer audience of its nearest competitor.
Auto Trader has three Revenue Streams:

Trade - Revenue from retailers and home traders advertising their vehicles and utilising Auto Trader’s products.

Consumer Services - Revenue from private sellers who can place an advert on the marketplace for a fee and from our partners who provide services to consumers.

Display Advertising - Revenue from manufacturers and their advertising agencies who advertise their brand or services on the marketplace.

The revenue split between the divisions is as follows:
Revenue Stream Percentage Absolute Value (2017)
Trade 84 £262.1m
Consumer Services 10 £31.8m
Display Advertising 6 £17.5m

The outlook for each of these is as follows form the 2017 Annual Report:

Trade – Average Revenue Per Retailer (ARPR) expected to increase by £130 per month (from £1546 per month), but no forecasts of number of retailers provided except flat or marginally down.

Consumer Services – Expected to be low single digits growth

Display Advertising – Expected low double digits growth

Financial Summary

2016 2017 2018 est
Turnover 281,600 311,400 322,500
PBT 155,000 193,400 202,000
Free Cash Flow 161,200 174,400 181,600
Dividend 1.5 5.2p 5.8p


Auto Trader displays many of the key traits of a great company.

• It has a strong competitive advantage, which because of the power of its brand would be extremely difficult for others to replicate
• It is a capital light business with fantastic Returns on Capital Employed. It has good opportunities to re-invest its capital in good growth opportunities in its core product offering.
• It has at been at the forefront of taking advantage of technological change to establish itself in its current position, and I will argue later why the business is resilient to technological innovation.

Key Insights

The Threat of New Entrants
One of the factors that has depressed share price recently is the perceived threat from Amazon. Following a report in July that Amazon was planning to sell cars in Europe, shares in Auto Trader fell by as much as 6% in a day. Amazon has been acting as a portal for a small number of Fiat models, where customers are funnelled to established dealerships. There is speculation that this model could be replicated in the UK.
The impact on this could be that New Car that currently comes through Auto Trader will in future go through the Amazon portal.
As a guide from the last annual report the Auto Trader platform hosts 6,000 new cars and 450,000 used cars, so the first point I would make is that the impact of an Amazon intervention of this type would have little impact.
Amazon would also not be the first time that Auto Trader has faced competition, in terms of competing for customers buying new cars. All major manufacturers currently have their own websites acting as portals that direct customers to dealerships, as well as a variety of other websites offering similar services. Amazon is unlikely to anything more than an additional channel for new car sales. It’s difficult to see how the presence of Amazon in this sector could have some transformational and disruptive impact on how customers purchase cars.
So what about the threat for other disruptive entrants. For an example of a supposedly disruptive model, take a look at https://carsnip.com/. Not impressed? Neither was I.

Cost of Staff
Another factor that has been given for avoiding Auto Trader shares is the cost of highly skilled digital staff that Auto Trader must recruit to continue improving its service offering. One of the concerns I have heard voiced is that the high cost of recruiting such staff will impact on Auto Trader profitability in the future. How anyone can predict what these costs will be in the future, or how anyone can make judgements about Auto Trader’s ability to manage such costs, is difficult to see. Expect to say that speculation, gut feel and hunches may be the rationale for this, perhaps linked to generalised anxiety about the impact of Brexit. Any hard data to support this is hard to come by.

The Fall of Diesel and the Rise of Alternative Fuel Vehicles
It would be easy to confuse the position of political hot potato that the Automobile Industry finds itself in, and the business of Auto Trader, as the cross over between the two seems inextricably linked. Take for example the current state of the new car market for diesels. Although this is having a major impact on the sale of diesels, and will be causing no end of anxiety for manufacturers and dealers, the impact on Auto Trader is that the mix of fuel types it advertises may be impacted, but total number of vehicles should not be.
Electric Vehicles and Hydrogen powered vehicles and their impact could also be categorised in this way, as environmentally driven developments that impact on the mix of advertising, but are likely to be positive on aggregate for Auto Trader.

The Rise of Driverless Cars
Driverless cars are on the horizon. It seems only a matter of time before we see driverless cars on our roads. How will this impact on ownership of cars? Will people continue to own their own cars, or will a system of on-demand availability be the prevailing model, or somewhere in between? This is a future trend that will impact the business. Whether that will be negative or positive is unclear at the moment, but a close eye needs to be kept on how this pans out in the future.

The Economy
Declining new car sales, appears to be impacting Auto Trader already. The number of traders advertising has declined by 2% in 2017, although this has been more than compensated for through increased revenue from remaining traders.
However, analysts have expressed concern that if the economy comes under strain that the number of traders could decline markedly and have a corresponding impact on Auto Trader revenue. One of the things that underpins this is the concern that the PCI contracts maybe a financial timebomb. The concern is that as interest rates rise, consumers will have no incentive to keep vehicles at the end of their contracts and will simply return them to dealerships. As dealerships build up a stock overhang, this will force down used car values. The stress this places on dealerships who already operating with wafer thin margins, is that many will go to the wall, and the revenue they provide to Auto Trader will go with them. So how likely is this risk?
An increase in the rate of defaults, a rise in interest rates, and dealerships overestimating the residual values of cars on PCP could create a perfect storm that leads to declines in used car values of 20%, matching those in the previous crash.
In this scenario it is conceivable that traders will go out of business quickly, and the ability of Auto Trader to make up for this shortfall in the face of the accompanying economic downturn would be severely tested.
How likely this is to happen is difficult to predict, but risks to the UK economy are a given, and Auto Trader is at the mercy of these factors, irrespective of our inability to predict them.
A more appropriate question is, how will a business like Auto Trader survive in such a downturn? With barely any capital expenditure requirements, and low debt relative to profits, and a compelling position in its market, Auto Trader is not immune to a blip in profits like any cyclical. However, any blip will not be structural and the size of the market will almost certainly return to the high levels or higher levels than that it currently enjoys.
For context according to figures from Statista (https://www.statista.com/topics/2190/th ... -industry/), the sharpest decline in the value of the car industry occurred from £66.3bn to £60.5bn in 2008, following which an upward trend resumed through to 2014 when the market was £88.5 billion. These figures were broadly in line with volumes in the new and used car markets.
Auto Trader has not been listed long enough to assess how it coped with the last downturn, and in any case is a fundamentally different business now due to its migration to now being a digital only platform. However, we have some indication of Auto Traders ability from its 2017 Annual Report. It states that
“We delivered increased Retailer revenue as a result of growth in Average Revenue Per Retailer (‘ARPR’), where there was improvement of £162 to £1,546 per month(2016: £1,384). Average retailer forecourts were down 2% to 13,296 (2016: 13,514)..”
It also states that the lower forecourt numbers were as a result of fewer non-car and small independent forecourts, offset partly by growth in franchise forecourts.
The good news is that Auto Trader can grow even when the number of advertisers shrinks. This is encouraging, but we have few clues as to its ability to grow revenue in a more severe downturn, where larger, more profitable retailers also feel the squeeze.
The economic cycle cannot be predicted, but Auto Trader has the attributes to withstand the inevitable pull-back.

Valuation
As of November 2017, 10 year UK Gilt yields stand at 1.35% and 30year Gilt Yields at 1.89%. If we take the median of these and add 2.75%, the required FCF / EV is 4.37%.
Using:
• a figure of £174.4 million of trailing free cash flow and from the 2017 annual report
• £355 million in net debt from the 2017 annual report
• a figure of 961,804,201 shares in issue reported by the company on November 29th 2017
I arrive at a fair value figure of £3.78 per share.

[westmoreland]

excellent article.

very well managed, with disciplined capital allocation. the vast majority of the profits are going on dividends and buybacks as online only.

the issue i have with auto trader is that their customers are grumbling about the relentless price increases. it would be better for me if private sales made up a greater proportion of listings, but it's quite minor. car dealers are also consolidating, which aint good either.

as you say, those fat profit margins are being monitored by amazon, if the papers are to be believed. if they did compete, you'd have to significantly devalue the business as amazon would be very happy to run a loss for many years.

it's a highly valued stock, but significantly cheaper than right move or just eat. it's got pricing power, but it's squeezing its customers til the pips squeak. you can be damn sure they will happily defect to amazon if they enter the game.

[Spet0789]

Good write up. Great company. Hold on to your cash and buy in 30% cheaper in mid 2019 when used car sales will be the floor and lots of dealers will be looking very over-leveraged.

[dspp]

"80% of car dealers advertise on Auto Trader,"

Am I right in thinking that this statistic's phrasing hints at the problem some of you are expressing. It is not "car dealers advertise 80% of their cars", instead it is "80% of car dealers advertise.... [at least one of their cars]"

Basically the fees are so high that private sellers <£5k are heading to gumtree, and trade sellers are just putting a few cars on Auto Trader so as to pull punters on to the trader's own website. That is a concern I have. The other concern is that there will come a day when eBay etc make a serious move at this market.

regards, dspp

[Topidiotboy]

Auto Trader results out yesterday, so an opportunity to provide a meaningful update

Compared to forecasts, ARPR is up £149 per month compared to forecasts of £130, whereas the number of retailers is down 1%

Display advertising up by 10%

Consumer Services down 5% against low single digits growth

The impacts of the economic cycle are being felt in the Consumer Services segment, but Trade continues to power ahead in a difficult market. 10% increase in revenue per retailer forecourt in an economy where the number of forecourts is declining because of macro-economic trends, shows the value of Auto Trader’s pricing power.

The share price is flying since the results came out, and my revised fair price using the same metrics as in my original post (ie FCF to Enterprise Value of 4.37%) come out at a nice round £4.00

[westmoreland]

Auto Trader results out yesterday, so an opportunity to provide a meaningful update

Compared to forecasts, ARPR is up £149 per month compared to forecasts of £130, whereas the number of retailers is down 1%

Display advertising up by 10%

Consumer Services down 5% against low single digits growth

The impacts of the economic cycle are being felt in the Consumer Services segment, but Trade continues to power ahead in a difficult market. 10% increase in revenue per retailer forecourt in an economy where the number of forecourts is declining because of macro-economic trends, shows the value of Auto Trader’s pricing power.

The share price is flying since the results came out, and my revised fair price using the same metrics as in my original post (ie FCF to Enterprise Value of 4.37%) come out at a nice round £4.00

i'm very wary if they are only growing revenues through jacking up prices. ideally a business like this charges a high (but not extortionate) price, and grows the dealer and private seller network to drive revenue and profit growth.

can dealers afford to keep paying an extra 10% a year? gillette had huge pricing power but eventually they got to the point where prices were so high that customers defected en masse.

[Stan]

Any thoughts on Auto's Finals out today https://www.londonstockexchange.com/exc ... 00458.html

[westmoreland]

Any thoughts on Auto's Finals out today https://www.londonstockexchange.com/exc ... 00458.html

another good year of growth. it's doing well - and no sign of amazon anymore. happened to me with GOCO too. everyone gets in a panic if amazon say they will enter a market.

[Stan]

Thanks Westmoreland I'm continually monitor them, very good news on Amazon I agree.

[westmoreland]

Thanks Westmoreland I'm continually monitor them, very good news on Amazon I agree.

that said, eBay are consolidating motors.co.uk, their own classified, and gumtree into one platform. amazon have a history of trying to crack cosy monopolies, but quickly realise whether it's worth persevering with. clearly they decided there was no point.

[Stan]

Thanks Westmoreland I'm continually monitor them, very good news on Amazon I agree.

that said, eBay are consolidating motors.co.uk, their own classified, and gumtree into one platform. amazon have a history of trying to crack cosy monopolies, but quickly realise whether it's worth persevering with. clearly they decided there was no point.

Indeed, that's one biggy out of the way.