More mileage in Auto Trader, even in a post-Brexit world

As we draw ever closer to a potentially defining moment in the history of UK politics, investors are bracing themselves for a wave of volatility.  While it would be impossible to completely mitigate the ramifications of a ‘Leave’ vote which could unleash a bout of indiscriminate selling, Martin Todd, European Equities Portfolio Manager at Hermes Investment Management, selects a UK stock that he believes would continue to perform well regardless of the referendum result: Auto Trader. 

Auto Trader – a Brexit-proof stock?

If the assertion is Brexit will have a negative effect on growth and impact sterling, we can make some assumptions. Firstly, companies with overseas imports would be affected. Secondly, if economic growth stagnates, staples and those less sensitive to changes in discretionary spending are likely to fare better.  Thirdly, borrowing costs would likely rise, harming capital intensive industries and sectors.

Relative immunity to each of these vulnerabilities makes Auto Trader attractive. Once a familiar staple on newsagent shelves, the classified advertising business for automobiles has transformed into the dominant online market place for cars. Its audience is now seven times larger than that of its nearest competitors, Gumtree and Pistonheads.  It is profitable too: the firm accelerated profit by 19% to £171.3 million as increased advertising revenue boosted sales. The FTSE mid-cap company’s first annual results since listing on the FTSE also showed that pre-tax profits moved up several gears to £155m from £10.9m last year, in part due to a decrease in financing costs.

Improving market efficiencies

Auto Trader is not overly impacted by prevailing macroeconomic uncertainty. Its business model is relatively unaffected by the rise and fall of used cars prices – advertisement listing prices do not change relative to the expense of the vehicle. Auto Trader also generates further revenue from selling information on transactions to dealers and through premium listing advertisements.

It has also fundamentally improved the economics of the used car market – for both buyers and sellers. It firstly has removed the drudgery of traipsing around forecourts, a positive for both buyers and sellers. Now instead of going to five or six different dealers, customers can undertake their research online and identify a shortlist of forecourts to visit. Many will already have made their buying decision and may visit only one car dealer. It also gives dealers access to a greatly expanded buyers’ market, simplifies customer visits, and gives them the ability to collect more information on those buyers.

Analogous to Rightmove

By linking thousands of buyers and sellers, Auto Trader has become analogous to Rightmove (their chairman is the former CEO of Rightmove), improving choice and creating more visibility around price comparison. In this way, it is shaping the way people will buy cars in the future.

Auto Trader is a high-margin, asset-light business with a singular focus on the UK. Its online business model does not require a large amount of employees, and capex requirements remain low.  Its unwavering focus on improving marketplace efficiencies and lean business model makes it a very compelling investment case. We believe there is plenty of opportunity for this stock to surprise on the upside.

The views and opinions contained herein are those of Martin Todd and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. The above information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.