Auto Trader is the largest car listing website in the UK and is one of the most profitable businesses in the FTSE All-Share index. The company listed in March 2015 at 235p and has made solid financial progress since then.
A business earning a high return on capital employed (ROCE) will inevitably attract new competitors. The only way, therefore, that a company can sustain a high return on capital is if it possesses competitive “moats.”
Auto Trader generated a return on capital employed (ROCE) of 59% in the year to March 2017. This means that every pound invested in the group – debt and equity – earned 59p of profit before interest and tax.
Most companies can only dream of generating a ROCE at this level with 15% considered attractive. Auto Trader has sustained a high ROCE on the back of two competitive moats: networks effects and a strong brand.
Auto Trader model & moats: network effects and a trusted brandSource: Auto Trader investor presentation
Listing platforms generate Network effects because additional listings attract more users and additional users attract more listings. People gravitate to the leading listing platform and have little incentive to switch to move elsewhere.
Gumtree Motors is the nearest competitor to Auto Trader and is owned by US group eBay. In January 2018, UK car buyers spent 678 million minutes on Auto Trader’s platform versus 138 million minutes on Gumtree Motors.
Auto Trader also benefits from having a trusted brand, which is particularly important in the used car sector. According to research, only 7% of car buyers trust car dealers and 23% find visiting a car dealership “daunting.”
There is a risk that Amazon or Facebook could use their brands to make an aggressive move into the UK car listing market. Network effects, though, suggest that it would be hard to usurp Auto Trader’s market leading position.
The end market for Auto Trader is, however, mature with UK used car sales expected to decline 1-3% in 2018 to 7.9 million vehicles. This compares to 7.5 million in 2007, before the financial crisis, and 6.9 million used vehicles in 2009.
Retailers and last 12 months live cars on Auto Trader’s websiteSource: Auto Trader
Physical stock on Auto Trader’s platform has grown 5% a year from 2013 with each car retailer listing more cars. In the six months to September 2017 there was a 3% year-on-year increase in vehicles on the platform to 451,000.
Auto Trader’s has seen solid top-line momentum recently with revenue up 8% in fiscal 2015, 10% in fiscal 2016 and by 9% in fiscal 2017. The operating profit margin has also improved from 57% in fiscal 2014 to 67% in fiscal 2017.
Turning to the balance sheet and the leverage ratio (net debt to EBITDA) declined to 1.55X at September 2017 versus 2.7X at September 2015. The company has been buying back shares since the IPO and looks set to continue doing so.
Auto Trader has delivered growth in a mature sectorSource: SharePad
When Auto Trader listed in March 2015 at 235p its forward P/E ratio stood at 18.3X. The forecast P/E ratio is currently 17.2X for the year to March 2019 and 15.5X for the year to March 2020 (using a share price of 340p).
Auto Trader is clearly a high quality business but the UK used car market is mature and cyclical. Revenue growth has been delivered on the back of increased listings per car retailer, new product offerings and price increases.
Disruption is a long-term risk with taxi apps like Uber, on-street car rental and autonomous vehicles reducing the need for car ownership. The independence that car ownership delivers, though, means that it is unlikely to disappear.
Disclosure: The writer does not currently hold shares in Auto Trader.
Concerns continue to mount over the future of retailer House of Fraser, after funding negotiation talks collapsed.
Department store House of Fraser is the latest in high street shops to feel the pinch in a difficult trading environment, amid stunted consumer spending and higher rents.
According to the Sunday Times, talks were held between the retailer and turnaround specialist Alteri Investors, a turnaround specialist.
However, the negotiations are understood to have failed to progress any further over debt concerns.
Specifically, House of Fraser is looking to refinance or extend the terms of £224 million in debt, which is set to be repaid in 2019.
A spokesman said: “House of Fraser is a privately-owned business. We have the full financial support of our shareholders.”
Back in 2014, the retailer was bought by Sandpower, which is owned by Chinese businessman Yuan Yafei.
In September it was revealed that Mr Yafei’s company injected £25 million in cash into the faltering department store, amid widening losses.
Since the acquisition, The high-street giant has sold off a portion of its brand names and intellectual property for £30 million, alongside identifying £26 million of annual cost savings, in a bid to turnaround its fortunes.
Fears are now mounting that House of Fraser may become the latest in collateral damage, following a string of high street closures, which have dominated the business news cycle in recent weeks.
Maplin and Toys R Us fell into administration last month, after both retailers failed to locate a buyer.
Similarly, restaurant owners in the U.K such as Cafe Rouge owner, Casual Dining Group, and Prezzo have announced the closure of hundreds of stores, in a bid to streamline costs.
Prezzo, which is owned by TPG Capital, announced on Friday the closure of some 94 restaurant locations.
As it stands, Debenhams has 59 stores across the U.K, employing some 6000 staff and an additional 11,500 concession workers.
Barclays (LON:BARC) shares price shot up last week after it was announced that activist investor Edward Bramson would be taking a 5 percent stake in the bank, sparking rumours that the institution may be heading for a shake-up.
Whilst early indications suggest that Bramson doesn’t intend to be too much of an ‘activist’ with Barclays, the bank’s numbers show that it remains operationally and structurally inefficient. Given Bramson’s previous experience as an activist shareholder, it is likely that he is hoping to push for some changes to bolster Barclay’s performance.
Bramson’s company, Sherborne Investors (LON:SIGB), said it had invested £580 million in the bank’s shares and derivatives. With a regulatory disclosure said Sherborne owned 1.94 percent of the shares, controlling the remainder of its 5 percent stake through derivatives.
Bramson is just one of several activist investors advancing their interest in household names of late.
Earlier in March, American activist investor TCI increased pressure on the Altaba (NASDAQ:AABA) to wind down and sell off its $76 billion holding in China’s Alibaba. The shareholder said that the company, who own the legacy assets of internet group Yahoo, was trading at an unnecessarily large discount to the value of its assets and should “take advantage to recent US tax reform to liquidate.”
In the engineering sector, activist hedge fund Elliott Advisors has lent its support to Melrose in the bidding process for engineering giant GKN (LON:GKN).
Elliott are one of the biggest shareholders in GKN currently and are campaigning for fellow shareholders to look kindly upon Melrose’ controversial offer.
The investor also sent a letter to GKN’s board, saying it was “sceptical of the company’s ability to deliver on Project Boost for its aerospace business”.
Shares in Instem (LON:INS) ticked up on Monday, after the company reported a promising set of results for the financial year, alongside a significant extension to a contract deal.
The IT solutions provider posted a 19 percent increase in revenue to £21.7 million, compared to £11.7 million.
In addition, recurring revenues rose 9 percent to £12.8 million. Software as a service revenues increased 10 percent to £4.4 million.
The company also appointed a new chief operating officer, Ms. MaryBeth Thompson, to help oversee the business.
Moreover, the firm also announced a significant contract extension with respect to its SEND platform.
The deal has been extended by US$400,000 to US$500,000, in a boost to profits.
Phil Reason, CEO of Instem, said: “Instem products and services now address aspects of the entire drug development value chain, from discovery through to market launch, and are currently deployed by over 500 companies, including all of the largest 25 pharmaceutical companies in the world. Management estimate that over 50% of all drugs on the market have been through some part of the Group’s platform at some stage of their development.”
“While new software license revenue was particularly strong in 2017, we also focused on opportunities to increase SaaS revenues and were very pleased to deliver an increase of over 10% during 2017, with both new SaaS customers and existing clients switching from on-premise to SaaS deployment.”
He continued: “The current financial year has started strongly with the largest S outsourced services contract win to date and one of the world’s largest chemical products companies converting to the Company’s market leading SaaS delivery model”
Looking ahead, Mr Reason remained optimistic of future growth prospects, he added:
“The Board therefore looks forward to the coming year and beyond with increasing optimism on the back of an enhanced delivery platform, which promises to deliver significant revenue growth, enhanced profitability and improved quality of earnings.”
Shares in the company are currently trading up 19.89 percent as of 10.10AM (GMT).
Shares in JD Sports (LON:JD) climbed over 3 percent on Monday, after investors showed their approval of the group’s acquisition of US athletic footwear company Finish Line.
Finish Line is listed on the NASDAQ stock exchange with a market capitalisation of approximately $425 million, and has 556 stores in the US. It also has 188 unbranded concessions in Macy’s stores and employs 3,700 full-time and 9,300 part-time staff.
Peter Cowgill, JD Sports’ executive chairman, commented: “Finish Line has many similarities to JD with a strong bricks and mortar offering complemented by an advanced and well-invested digital platform.”
He said: “This is a landmark day for JD and will be transformational for the business.”
In a statement, the company said the acquisition offers the Company the opportunity to expand its market leading elevated proposition into the most significant global market, immediately gaining the benefit of a significant physical and online retail presence and increases the importance of the company to its major international brand partners.
Shares in JD Sports are currently up 3.15 percent at 367.00 (0954GMT).
Speedy Hire (LON:SDY) shares soared on Monday after the group upgraded their profit guidance and reported an increase in revenue.
The tools and equipment hire company Speedy Hire said adjusted pre-tax profits were expected to be ahead of its previous expectations and that revenue had grown by 6 percent.
The increase was driven by a renewed focus on small business customers, the company said, with the return on capital employed for the year expected to be around 11 percent, up from 7.7 percent the year before, amid a continued reduction in the size of the group’s fleet.
Net debt at 31 March was expected to be approximately £80m after expenditure of £23 million on acquisitions.
The announcement comes after a similar one was made in September, telling investors to expect higher profits than initially anticipated.
Shares in Speedy Hire are currently trading up 7.41 percent at 51.88 (0916GMT).
Inchcape (LON:INCH) announced the acquisition of Central American automotive retailer Grupo Rudelman on Monday, sending shares up 1.2 percent.
The group confirmed it had offered $284 million for the retailer on a cash-free and debt-free basis. The acquisition is expected to boost Inchcape’s earnings in first full year post-acquisition by mid-single digit percentage, as well as increase their presence in Central America. Grupo Rudelman is the distributor and exclusive retailer for Suzuki in both Costa Rica and Panama.
Stefan Bomhard, Group CEO of Inchcape plc, applauded the acquisition for highlighting the group’s “commitment to investing for growth and allocating capital in a disciplined manner.”
“We are acquiring a strong, well-managed business and I am very pleased to welcome the Grupo Rudelman team to Inchcape. I am delighted to significantly enhance our relationship with Suzuki, a brand that is well positioned for growth and success in emerging markets, with whom we are proud to have partnered for over 40 years.
“With this acquisition we continue to actively position Inchcape towards higher growth markets and higher return Distribution businesses. Distribution trading profit, on a pro forma basis, now equates to 81 percent of total Group profit in 2017. In addition, Inchcape’s portfolio and presence in Latin America has been significantly strengthened, and I am excited about the future opportunities this presents.”
Shares in Inchcape are currently up 1.27 percent at 680.00 (0853GMT).
Shares in YouGov (LON:YOU) jumped nearly 5 percent in early morning trading on Monday, after reporting a 78 percent profit boost over the first half of its financial year.
Pre-tax profit hit £4.5 million over the six month period, up from £2.5 million a year earlier. Revenue at the data analytics company more than doubled to £56.3 million.
The group pointed to a “significant US weighting” in their revenues, which allowed them to remain positive about performance despite Brexit uncertainty.
“Trading during the second half has continued positively,” the company said.
“While ‘Brexit’ continues to create uncertainty in the economic and political environment, especially for UK and European businesses, the international spread of our revenues–with a significant US weighting–positions our business well to cope with, or even gain from, potential volatility.
“In the context of both the macro-environment and our own plans to accelerate our investment in technology and geographic expansion, we remain confident of our expectations for the full year.”
Shares in YouGov jumped 4.11 percent to 390.00 (0835GMT).
The deputy chairman of Fever-Tree (LON: FEVR) is celebrating a £82.5 million payday after selling a stake in the group.
Charles Rolls, a co-founder of the mixer maker, cashed in the group’s recent success and offloaded a 2.6 percent stake.
Since the group’s stock market flotation in late 2014, share prices of the beverage company have increased over 1000 percent. In the past 12 months alone, the share price has jumped 90 percent.
Chief executive, Tim Warillow, said the company has had an “encouraging start to 2018 and remain confident that we are increasingly well positioned to deliver further growth across the business”.
Rolls sold a total of three million shares, each priced 2,750 pence. He still owns an 8.6 percent stake in the group.
This is not the first time Rolls has made a significant sum from cashing in shares. Last year, the co-founder and deputy chairman cashed in £73 million worth of shares.
Fever-Tree has rapidly expanded its international sales and makes the bulk of annual revenues in the US, Spain and Belgium.
Rolls began his journey into tonic water when he noticed that the world’s finest gins were mixed with mass-produced mixers.
The company offers a premium tonic water with no artificial sweeteners, preservatives or flavourings.
“There’s no point having a good gin if the tonic isn’t right,” he said.
The group now sells 12 different mixers.
Shares dropped 5.4 percent to 2,796 pence in morning trading.
Donald Trump wasted no time in attacking Joe Biden amid rumours the former vice-president will run for President in 2020.
Taking to Twitter, Trump said that Biden would “go down fast and hard, crying all the way” if the two were to ever take part in a fight.
Trump’s tweet was in response to Biden’s previous comments about Trump’s comments about women.
Speaking at a University of Miami rally to combat sexual assault, Biden said: “A guy who ended up becoming our national leader said, ‘I can grab a woman anywhere and she likes it,’ ”
“If we were in high school, I’d take him behind the gym and beat the hell out of him,” he added.
“I’ve been in a lot of locker rooms my whole life. I’m a pretty damn good athlete. Any guy that talked that way was usually the fattest, ugliest SOB in the room,” he said, referring to the leaked tape that surfaced during the 2016 election.
Trump responded with a fierce tweet: “Crazy Joe Biden is trying to act like a tough guy. Actually, he is weak, both mentally and physically, and yet he threatens me, for the second time, with physical assault. He doesn’t know me, but he would go down fast and hard, crying all the way.”
Rumours of the former Vice President running for the White House in 2020 have been rife, with Biden saying he believed he could have beat Trump in the 2016 election.
While he considered running in the last US election, he decided against it after the death of his son.
Biden is still very much active in politics and on Thursday, announced a three-point “Plan to Put Work – and Workers – First”.
Source: Auto Trader investor presentation
Listing platforms generate Network effects because additional listings attract more users and additional users attract more listings. People gravitate to the leading listing platform and have little incentive to switch to move elsewhere.
Gumtree Motors is the nearest competitor to Auto Trader and is owned by US group eBay. In January 2018, UK car buyers spent 678 million minutes on Auto Trader’s platform versus 138 million minutes on Gumtree Motors.
Auto Trader also benefits from having a trusted brand, which is particularly important in the used car sector. According to research, only 7% of car buyers trust car dealers and 23% find visiting a car dealership “daunting.”
There is a risk that Amazon or Facebook could use their brands to make an aggressive move into the UK car listing market. Network effects, though, suggest that it would be hard to usurp Auto Trader’s market leading position.
The end market for Auto Trader is, however, mature with UK used car sales expected to decline 1-3% in 2018 to 7.9 million vehicles. This compares to 7.5 million in 2007, before the financial crisis, and 6.9 million used vehicles in 2009.
Retailers and last 12 months live cars on Auto Trader’s website
Source: Auto Trader
Physical stock on Auto Trader’s platform has grown 5% a year from 2013 with each car retailer listing more cars. In the six months to September 2017 there was a 3% year-on-year increase in vehicles on the platform to 451,000.
Auto Trader’s has seen solid top-line momentum recently with revenue up 8% in fiscal 2015, 10% in fiscal 2016 and by 9% in fiscal 2017. The operating profit margin has also improved from 57% in fiscal 2014 to 67% in fiscal 2017.
Turning to the balance sheet and the leverage ratio (net debt to EBITDA) declined to 1.55X at September 2017 versus 2.7X at September 2015. The company has been buying back shares since the IPO and looks set to continue doing so.
Auto Trader has delivered growth in a mature sector
Source: SharePad
When Auto Trader listed in March 2015 at 235p its forward P/E ratio stood at 18.3X. The forecast P/E ratio is currently 17.2X for the year to March 2019 and 15.5X for the year to March 2020 (using a share price of 340p).
Auto Trader is clearly a high quality business but the UK used car market is mature and cyclical. Revenue growth has been delivered on the back of increased listings per car retailer, new product offerings and price increases.
Disruption is a long-term risk with taxi apps like Uber, on-street car rental and autonomous vehicles reducing the need for car ownership. The independence that car ownership delivers, though, means that it is unlikely to disappear.
Disclosure: The writer does not currently hold shares in Auto Trader. 
