Auto Trader: Slow and steady wins the race

UK-listed Auto Trader has been a core holding in the Fund since 2018, delivering our investors an excellent 88% return or 140% after accounting for dividends. We first profiled the business in 2019, where we discussed the Brexit related headwinds the business was facing and the surprising notion that sometimes great companies in no growth industries can deliver excellent shareholder returns. Since our profile in 2019, Auto Trader volumes (cars listed on the website) have declined by ~1% and industry wide volumes (the total number of used car transactions) have fallen by ~10% as COVID related supply chain issues impeded the supply of new cars and consumers opted to hold onto cars for longer.

Ostensibly this would be a difficult environment for Auto Trader, yet the business grew its earnings per share by 87% over the same period. As you may have noticed the share price performance (+88%) has mirrored almost exactly the growth in earnings per share (+87%), meaning that today the business trades at 21x earnings, identical to the 21x we originally purchased the business for in 2018. In this profile we will re-examine the investment case for Auto Trader and the characteristics that make it a quality business.

Online classifieds pioneer

Auto Trader originated in 1977, as a quirky regional print advertising publication, called ‘The Thames Valley Trader’. The magazine showcased everything from planes to houses, gradually expanding its physical reach across both the UK and Ireland.

Twenty years later, Auto Trader successfully transformed into digital classifieds and moved online in 1996, allowing consumers to buy and sell automobiles online. This is an impressive feat, given this is a battle that many traditional print businesses have lost across the world in recent decades. Auto Trader closed its printing presses and shrunk its employee base by more than 80% to a fully digital operation with less than 1,000 employees.

Throughout its transformation, Auto Trader displayed impressive corporate agility and capitalised on its first mover advantage to grab the lion’s share of UK auto classifieds eyeballs before new pure play competitors launched and attempted to catch up.

Agile business

Auto Traders’ head start, adaptability and commitment to innovation has enabled it to move fast and scale quickly to build a sizeable audience of committed buyers and high-quality sellers. Management have consistently invested in technology platforms, improving the efficiency of transactions and the user experience for both sides, therefore creating more value for either side of the network as it grows.

Today, Auto Trader remains the largest digital automotive marketplace in the UK for new and used cars where it has over 75% market share. Approximately 14,000 retailers connect with 10.3m unique buyers per month, including 6.3m who won’t be found anywhere else. Consumers visit the marketplace 81.5m times per month where they spend a total of 595m minutes searching, viewing and comparing stock.

Unsurprisingly, this moat has been difficult to penetrate. Competitors come and go, but given the quality of Auto Trader leads, it is difficult for challengers to provide enough value for dealers to exclusively use their platforms – it’s tough to argue when vehicles listed on Auto Trader sell 50% faster.

Auto Trader has also integrated its platform within the back end of its customer’s businesses, improving their efficiency and profitability e.g. Auto Trader recently released AI listing features for retailers reducing the time spent to list a car from ~30mins to virtually instantaneous.

The company provides valuable insights and data for buyers and sellers to make the most informed decisions – consumer trust in Auto Trader is high and brand awareness has surpassed 90%.

Exceptional financial execution

Auto Trader primarily monetises its marketplace via a recurring subscription model to dealers seeking to list cars and advertising fees charged to private sellers. The value created for customers is evident by the average revenue per customer increasing 9% annually for the past ten years driven by upselling customers to new or more premium products and pure price increases. Since its 2014 IPO, Auto Trader has achieved average annual revenue growth of 10% and margins have expanded from low 40% range to high 60%. The business is highly cash generative allowing management to pay 30% of earnings in dividends and use the remainder to repurchase shares while running the business with no debt.

The Fairlight View

At Fairlight we screen out macro dependent, leveraged and cyclical businesses in favour of capital light, business to business models with pricing power. Auto Trader dominates its niche with buyers spending 10x more time on the site than on the nearest competitor’s and its subscription-based revenue model delivers stable, predictable cash flows. While the company has growth opportunities in enabling digital retailing for customers and capturing more value on vehicle sales, its financial characteristics fit the stable compounder profile we seek at Fairlight, delivering consistent and reliable earnings growth over the long term.

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