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On Thursday, Citi analysts upgraded Auto Trader Group PLC (AUTO:LN) (OTC: ATDRY) stock from Neutral to Buy, adjusting the price target to GBP 9.46, up from the previous GBP 8.81. The upgrade reflects a positive outlook on the company's position in the current economic climate, as well as its competitive standing and valuation. According to InvestingPro data, Auto Trader demonstrates exceptional financial health with a perfect Piotroski Score of 9 and maintains an impressive 80.86% gross profit margin.
Citi's analysis suggests that Auto Trader is poised to outperform within the sector, citing the used car market's countercyclical nature and the company's robust competitive position. The analysts also noted that Auto Trader's valuation appears reasonable, and they anticipate revenues and adjusted operating profit to surpass the Visible Alpha consensus by 4-5% for FY27. The company's strong financial position is evidenced by its healthy return on equity of 50% and minimal debt-to-equity ratio of 0.01.
The potential for additional growth was identified in the possible success of Auto Trader's Deal Builder and a quicker recovery in leasing operations than initially expected. Citi analysts believe that if the Deal Builder initiative delivers as anticipated, Auto Trader could significantly benefit from the rising trend of online used car sales.
The analysts also commented on Auto Trader's valuation relative to its peers, observing that the company is trading at a 16% discount to the average FY25 P/E of rivals RMV, BCG, and G24. This, combined with the possibility of mid to long-term growth, presents an attractive investment opportunity according to Citi.
In their report, Citi analysts based the new price target on a discounted cash flow (DCF) model with an 8.4% weighted average cost of capital (WACC) and a long-term growth rate of 3%. The revision in Auto Trader's stock rating and price target reflects a confident stance on the company's ability to navigate and thrive in a challenging macroeconomic environment. With an overall financial health score rated as "GREAT" by InvestingPro, the company's strong cash flows and consistent dividend payments over the past 10 years further support this positive outlook.
In other recent news, Auto Trader Group PLC reported a robust half-year performance despite dynamic market conditions. The company's six-month results ending September 30, 2024, showed an 8% increase in group revenue, a 14% rise in operating profit, and a 22% growth in basic earnings per share. Core revenue also saw a 9% increase, with retailer revenue meeting expectations.
The company's digital retailing capabilities and data services are set to be enhanced, with strategic focus on scaling customer numbers, improving conversion rates, and adjusting the leasing journey. Despite certain market conditions leading to lower stock lever guidance for the full year, Auto Trader remains committed to its goal of net-zero carbon emissions by 2040.
The Autorama segment, while generating revenue, also reported an operating loss. Yet, the integration with Autorama led to operational efficiencies and expectations to double current deal and delivery numbers. These are some of the recent developments that shape the company's future trajectory.
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