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Goldman Sachs upgrades Auto Trader as sees “more positive outlook” for media sector

Ascential was a top pick for its “mispriced structural growth and turnaround potential” and Relx was also highlighted as “mispriced”

Auto Trader Group plc -
Goldman reckons Auto Trader's end-market is improving

Auto Trader Group plc (LON:AUTO) was upgraded by Goldman Sachs and WPP PLC (LON:WPP) downgraded as analysts reviewed a media sector that has underperformed the market in three of the past four years.

Generally, analysts at the bank expect media to outperform the market this year, as the industry enjoys a “more positive earnings growth outlook” supported by an improving macroeconomic backdrop, a favourable events calendar, a step-up in share buybacks and cost-cutting.

Despite this, the sector’s average share trades at 15.8 times forecast earnings, a 5% premium to the market that is the lowest in seven years, with the last decade having seen media shares trade at an average 12% premium to the wider market.

Structural shifts to drive performance split

“We believe structural shifts will continue to drive a bifurcation in stock performance — as they consistently have since 2016,” Goldman’s analysts said, meaning they were looking for companies where shares were “mispriced” or exposed to attractive cyclical end-markets.

One idea within this broader theme, was to buy stocks that are “secular growers with cyclical end-market exposure”, such as Auto Trader, which was upgraded to ‘buy’ from ‘neutral’ and the target price lifted to 688p from 604p.

The car selling website has sustained its leadership position in the “structurally attractive” UK online autos classifieds market, with the end-market outlook for used car transactions seen to be improving.

Ascential PLC (LON:ASCL) was one of the top picks for its “mispriced structural growth and turnaround potential”, while Relx PLC (LON:RLX) was highlighted as a “mispriced secular grower”, with both rated ‘buy’.

Meanwhile, the analysts espoused avoiding “expensive defensive names with negative growth inflection”, such as Informa PLC (LON:) and “value stocks with compressing returns” such as Pearson PLC (LON:PSON) and DMGT (LON:DMGT), with all three kept on ‘sell’ ratings.

WPP, which was downgraded to ‘neutral’ from ‘buy’, did not fit into a theme but was downgraded to ‘neutral’ from ‘buy’ and its target price kept at 1,160p as a slight improvement in the shares last year laves the risk/reward profile as “more balanced”.

Peel Hunt's media picks

Elsewhere, analysts at Peel Hunt also rejigged their stance on the media sector, downgrading Bloomsbury Publishing Plc (LON:BMY) and YouGov PLC (LON:YOU) to 'add', and Reach PLC (LON:RCH) to 'hold', while also upgrading Moneysupermarket.com Group PLC (LON:MONY) and AutoTrader to 'add' from 'hold'.

"We expect 2020 to be a year of resolution for some major themes, but how these will play out is far from clear," the analysts said, giving a nod to trade dealing between the UK and EU, the US and China and the US election.

"Thus, in contrast to last year when geographic diversity and balance sheet robustness would be a key feature of our stock selection, this is less clear this year."

As a result, rather than a thematic selection, stock-picking has led to the broker's core media recommendations for 2020 being Ascential, Future PLC (LON:FUT), Kin & Carta PLC (LON:KTC), Learning Technologies Group (LON:LTG) and Next Fifteen Communications Group PLC (LON:NFC), along with clients GoGo Group and STV Group.

These are felt to offer "potential for material revision to group prospects" and "a compelling valuation opportunity".


Quick facts: Auto Trader Group plc

Price: 570.4 GBX

Market: LSE
Market Cap: £5.51 billion

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