Yesterday shares in used car website Auto Trader (AUTO) slumped nearly 4% after Berenberg initiated on the stock with a ‘sell’ recommendation and 350p price target.

The shares are stabilising, ticking up 0.3% to 406.9p, and today Liberum’s Ian Whittaker, who is a fan of Auto Trader, takes the opportunity to address Berenberg’s bear case.

The nub of the German investment bank’s argument is that growth from the company could be slower and less profitable than the market expects.

It believes used car transactions could tail off in the UK, sees the risk of increased competition, thinks the company may struggle to lift average revenue per retailer, identifies scope for margin pressure, and argues the valuation looks unappealing relative to its online peers.

PUTTING THE BULL CASE

Whittaker, who reiterates his ‘buy’ call and 530p price target, addresses each of these arguments. He notes: ‘History suggest the UK used market holds up well in downturns, for example, in 2008 the value of the used car market declined -2.7% vs -14.8% for new cars.’

In terms of the competitive landscape he draws a parallel with the online property portal market where Google unsuccessfully attempted to enter the market.

On margins he identifies scope to further reduce staff costs, which he flags were 19.2% of March 2016 sales compared with 12.5% for online property portal Rightmove (RMV).

He agrees the current valuation is wrong but sees the shares as being under rather than overvalued. ‘The 14% discount to its historic average 12 month forward PE provides investors with an opportunistic time to buy a market leader at an attractive price ahead of the March 2017 results on the 8 June,’ he adds.

To read our view on Auto Trader in the latest issue of Shares click here.


Issue Date: 18 May 2017