With the outlook becoming ever cloudier for the UK motor market — and consequently the revenues outlook for Auto Trader (LSE: AUTO) — I reckon now is the prime time for investors to switch out of the listings giant.
Auto Trader recently toppled from 18-month highs above 435p per share, but I reckon the stock has much, much further to fall, particularly given its high valuations.
Latest retail data from the Office of National Statistics released last week suggest that demand for big-ticket items like cars could come under increasing pressure.
The ONS announced that retail sales dropped 1.2% in May from the prior month, while a 0.9% rise year-on-year represented the most sluggish rate of growth for more than four years. And particularly worrying for Auto Trader, sales of non-food items dropped 1.2% from the same month in 2016.
And most recent data from the auto industry should certainly be sounding alarm bells. The Society of Motor Manufacturers and Traders advised earlier this month that new car sales in the UK dropped 8.5% during May, to 186,265 units. And the wilting appetite for expensive items like new vehicles is likely to filter down into the second-hand segment, too.
As if this wasn’t enough, Auto Trader also faces additional headwinds as the growing influence of car supermarkets puts independent dealerships out of business. Indeed, it advised that the number of retailers using its services slipped 2% in the 12 months to March 2017.
Despite these worrying signals however, the City does not expect Auto Trader’s earnings to hit any roadbumps. A 14% advance is anticipated for fiscal 2018, and an extra 13% rise is predicted for next year.
Yet I believe these excited forecasts are in danger of chunky downgrades in the months ahead, and that a forward P/E ratio of 22.6 times fails to reflect this. I reckon Auto Trader is a prime candidate for severe share price weakness.
Too much trouble?
I also believe Petra Diamonds (LSE: PDL) remains a risk too far right now.
The stones specialist sank to 21-month troughs this week after the South African government announced a tough new mining charter that could smack the long-term earnings of Petra. Among a cluster of new rules suggested by mining minister Mosebenzi Zwane, the business would have to raise the minimum level of black ownership from 26% at present to 30%.
But whether or not the new framework sees the light of day, I reckon Petra is already laden with too much trouble. The company saw diamond production flatline during January-March, at 999,768 carats, reflecting the impact of severe rainfall in South Africa and Tanzania. This result could put Petra’s full-year target of 4.4m carats under severe pressure.
And aside from the operational risks associated with Petra’s operations, although diamond prices have stabilised more recently, stones values could move back into reverse should consumer confidence in the key US marketplace continue to topple.
The number crunchers expect Petra to generate earnings growth of 15% and 91% in the years to June 2017 and 2018 respectively. While a forward P/E multiple of 13.4 times is decent value on paper, this is not low enough to fairly reflect the digger’s high risk profile, in my opinion.
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Auto Trader. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.