Today's results show this company has all the hallmarks of a quality share

The Motley Fool
Ferrari red car
Ferrari red car

With so much happening across the pond, it's easy to forget that some of the UK's most promising companies are releasing results this week. One example is Auto Trader(LSE: AUTO), the £3.7bn cap online automotive marketplace and relatively new FTSE 250 constituent.


Since debuting on the market in April 2015, shares have motored ahead by 45% to yesterday's closing price of 386p. But can this momentum be maintained? Or has Auto Trader picked the perfect time to release some less-than-impressive stats? Let's take a look under the bonnet.

Speeding ahead

With revenue climbing 11% to £153.9m and operating profit up 21% to £100.6m, there seems little for shareholders to complain about this morning. At 7.65p, basic earnings per share came in 28% higher than the same figure for the first half of 2016. Perhaps most importantly for those who dislike their companies carrying too much debt, Auto Trader also announced that this figure had fallen £33.1m over the last six months. While the net debt figure still looks considerable at £359.5m, it's pleasing to see that the company is keeping to its word and steadily addressing this.

In addition to re-affirming the company's confidence that it would meet growth expectations for the second half of the year, CEO Trevor Mather also reflected that the Auto Trader had "felt no discernible change in the competitive environment and no noticeable impact from Brexit to date." For investors who get twitchy whenever our EU referendum departure is mentioned, this statement will no doubt provide some relief.

All in all, this was a very positive set of figures from the Manchester-based business, fully justifying the 3.2% rise in its share price in early trading.

But judging a company by one set of results should never be considered sufficient if you're thinking of investing your hard-earned cash. To really understand if Auto Trader is worth a place in your portfolio, we need to dig a bit deeper.

Pole position

Although the hallmarks of a quality company can be subjective up to a point, I'm looking for those businesses that are able to generate consistently high levels of return on the capital they invest, have high operating margins and a strong balance sheet. Some kind of competitive advantage wouldn't go amiss either.

Auto Trader satisfies the above criteria. Since 2012, annual returns on capital employed (ROCE) haven't dipped below 24%. Operating margins have been even higher, averaging just below 50%. While the net debt figure shouldn't be forgotten, the fact that operating cash flow increased by a very respectable 17% to £100.8m in the last six months suggests the company has a firm grip on its finances.

One of the main reasons Auto Trader appeals to me so much is its similarity to that other go-to online giant Rightmove. Just as the latter has become a byword for property searching, the former shows every sign of doing the same for vehicles, especially as it boasts a consumer audience four times larger than its nearest competitor. It's this advantage and the growth potential offered by its pureplay online business model that really grab me.

Some may baulk at a forward price to earnings (P/E) ratio of 26 but Rightmove has consistently traded on similar valuations for many years. If Auto Trader can replicate the former's share price performance, investors will be on to a winner.

Hooked on growth?

As more and more of us go online to search for our next car, the next few years could be very interesting indeed for Autotrader.

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Paul Summers owns shares in Auto Trader. The Motley Fool UK has recommended Auto Trader and Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.