Auto Trader reveals its pricing power

Rising car prices have been the poster child for inflation. Before supply shortages became mainstream, analyst were flagging the lack of semiconductors and the knock-on impact on the car industry. Many car companies have announced they will be making fewer vehicles in the coming year and this has pushed up the price of used cars as well.

There was a risk this situation could be difficult for car marketplace Auto Trader (AUTO). Car retailers pay to put their cars on the website, which means if they have fewer cars, then they pay Auto Trader less money. Volume is the key thing in this model.

For now, though, this concern is misplaced. In the first half of the this year, revenue and operating profit rose 82 per cent and 121 per cent, respectively, compared with last year. This number was slightly skewed because Auto Trader offered a 100 per cent discount to support retailers at the start of the pandemic, knocking the previous period's sales. 

Operating profit was still up 15 per cent on a two-year basis.

The supply shortages were evident in some areas, however. The number of live cars advertised on the website decreased by 9 per cent to 436,000 in the half. The average revenue per retailer increased by 82 per cent to £2,199, though, the comparator also boosted by the discounts offered last year.

Removing these, the underlying increase was £353. Raised prices contributed £74 of this, while £160 came from retailers spending more to get their cars highlighted on the website. 

The ability of Auto Trader to raise its prices shows its importance to car retailers. And its discount last year will have only ingratiated it further. This pricing power enabled it to raise its operating profit to a very impressive 70 per cent from 58 per cent last year.

Despite the potential headwinds of lower volumes of available cars continuing into next year, these healthy margins mean broker Peel Hunt is forecasting cash profits of £286m for the full-year numbers. This would be an 70 per cent increase on 2021.  

A concern is that if supply chain issues persist car sellers will rein in spending, limiting Auto Trader's ability to keep raising prices. So far, consumers have seemed happy to pay more for their vehicles but this might not last for ever. With headwinds on the horizon, a one-year forward price/equity of 24.5 looks fair at only a fraction above its five-year average of 23.6 times. Hold.

Last IC View: Hold, 613p, 10 June 2021