In their first note on the FTSE 100 car sales platform, analysts cited “many enviable traits” such as Auto Trader’s growth, margin expansion, “exceptional cash flow generation” and low leverage.
They also praised the company’s switch to online, having made its name as a magazine which was first published back in the seventies.
“Auto Trader's reinvention as a digital business saw it harness its 40-year roots in used cars to the rapidly evolving sensibilities of car buyers (chiefly, using the internet to erode the information asymmetry car retailers used to habitually exploit),” read a note to clients.
“Auto Trader's pre-eminence, with careful nurture, is now inimitable and therefore, probably impassable. It is this enviable Kingmaker status that informs its entire Horizons strategy.”
Auto Trader has previously spoken of three horizons for its business, each of which should mark a period of acceleration for the company.
Big potential in new car listings
In current focus in horizon one, is the used car market, but horizon two will see it use its platform to move into new car advertising. In horizon three, it hopes to take all car transactions off the dealership forecourt and be purely online.
Part of the excitement for Jefferies is that it believes horizon one, the first inflection point, is still in its infancy.
“The reinvention as an online classified platform to digitalise the used car buying process has two favourable characteristics: inexorable momentum (from network effects and scale benefits); and retailers realising that their utility has shrunk from research / transaction / after-sales to transaction / aftersales, creating the incentive to parcel out more of the selling cycle costs to Auto Trader.
“We therefore see average revenue per retailer (ARPR) growing 6%-9% as Auto Trader leverages: 1. Its pricing power; and 2. Product innovation to up-sell retailers to higher functionality packages or cross-sell its Managing Products.”
Price target set at 450p
As for Horizon two, the analysts reckon the push into the new car space could be a key earnings driver further down the line.
“In our view, this is an opportunity well within Auto Trader’s ability to grasp,” they said in the note.
“With the right functionality and product design, the Horizon 2 strategy could be a material source of upside earnings risk in time.”
Shares revved 1.6% higher to 458p in late-morning trade on Wednesday, slightly above Jefferies’ 450p price target.