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Buying and selling houses and cars are big decisions, fraught with pitfalls and potentially big financial implications, on top of the pleasure or disappointment the purchase may eventually bring. No surprise then, that the internet has transformed both marketplaces, by allowing buyers and sellers to research their options, free of the siren voice of the estate agent or car salesman.
Two companies dominate the online listings markets for UK houses and cars. Rightmove is the leading property portal, whilst Auto Trader has cornered the lion’s share of the vehicle listings market.
In the listings business, what matters is how much of the market you can lay claim to. Rightmove’s early start gave it a big advantage; the company was set up in 2000 by four big estate agency chains, so it was able to show a big slice of the market, making its website a must-see destination for buyers. Like a snowball rolling downhill, the bigger Rightmove became, the more likely it was to become bigger still, as agents found that if they were not on Rightmove, potential sellers would go to an agent who was.
No recommendation
No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.
Rivals never quite got the same critical mass and now Rightmove has around 78% market share, in terms of pages viewed on UK property portals. Crucially though, Rightmove’s website features almost all of the properties listed for sale with estate agents in England and Wales and 94% of sellers say they expect their property to be listed on Rightmove.
Agents pay a fixed fee per office, per month and can also buy advertising and analytics. So Rightmove’s money comes in, so long as the agent is trading, busy, or not. Rightmove believes that a decade ago, agents typically spent around £2,500 per office per month on print media. Today, Rightmove is on target for revenues per agent of £750 pcm. Estate agents still spend around £190m each year on print advertising, money which Rightmove hopes will migrate toward it over time.
Rightmove has a fairly static cost base, so additional revenues flow quickly into profits and capital investment requirements are low. So Rightmove throws off cash, which it has returned to investors through ordinary and special dividends, accompanied by share buy-backs. It has been a powerful cocktail so far; the stock has risen more than tenfold since listing at 335p in 2006. It seems unlikely that pace can continue, for the shares now trade on as high a multiple as they ever have, circa 35x forward earnings.
But the business is very high quality, with profit margins of over 70%, net cash on the balance sheet and a proven strategy for growing sales and profits through developing new digital media offerings for agents to purchase on top of the basic listings service, accompanied by steady price increases.
Auto Trader started out as a Thames Valley ‘small ads’ paper almost forty years ago but now generates more page views for motor retailers than any other source. You can sell your own car via the site, but around 70% of the revenues come from the trade.
As well as listings, Auto Trader sells retailers analytics, which help them optimise their forecourts in terms of models stocked and pricing of cars. This sort of product can increase revenues from a retailer by 20%. The average retailer pays Auto Trader circa £1,300 per month, and with 85% of the UK car buying public’s time spent looking at automotive classified sites spent on Auto Trader, it is easy to see why. The group claims to have around twice the stock on their site than their nearest competitor.
Auto Trader and Rightmove have many things in common, including the people. Rightmove’s finance director used to work at Auto Trader, whilst Auto Trader’s chairman used to be Rightmove’s CEO. The two shares trade on similar ratings, almost 35x forward earnings. The difference is that Auto Trader only listed this year and having been owned by Private equity house, Apax, it still carries a lot of debt.
Rightmove plc3,930.00p
0.77%
Auto Trader Group plc386.00p
1.45%
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But the debt is falling fast, because Auto Trader is very cash generative and the reduction in finance charges as the debt falls should further enhance earnings growth. Consensus forecasts suggest earnings will grow in the high teens over the next few years, a little faster than Rightmove. Both look to be strong players, and their service is so fundamental to their customers’ operations, making them defensive in nature.
UK house prices are high, but transaction levels are still well below pre-recessionary levels. Similarly in the motor trade, although new car sales volumes have recovered well, the second hand market has yet to take off. But the higher numbers of new cars sold two or three years ago will start appearing on forecourts soon, which could give an impetus to second hand sales, which ought to be positive for Auto Trader. Dividends are expected to commence with the interim results this year although if announced these will be variable and not guaranteed.
It’s hard to foresee who will be the winner between these two stocks. Both have cornered their markets. Both provide a service which their customers would be extremely loathe to forgo. Both trade on high earnings multiples, but both are expected to grow well over the medium term, generating a lot of cash in the process although of course there are no guarantees.
For me though, Rightmove could offer better prospects, simply because I think that ongoing level of spending by agents on press adverts that fewer and fewer people see, gives the company a great source for potential future growth, by persuading the agents that Rightmove will give them a bigger bang for their buck.
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