I’m eyeing up Auto Dealer Group (LSE: AUTO) as a possible progress inventory purchase, after FY outcomes smashed by market expectations.

The share price stormed forward of the FTSE 100 on 30 Might, spiking up 13% on the day.

The shares are up 35% up to now 5 years too. There’s not a lot in dividends, however I believe that will be a good efficiency even and not using a pandemic and a inventory market crash.

Hovering revenue

Auto Dealer supplies the UK’s greatest automotive market, and its dominance confirmed.

Headline figures for the yr to March 2024 included a 14% rise in income, with working revenue up 26%. It means-adjusted earnings per share (EPS) gained 8%. Money move is significant, and that appeared good too — working money move rose by 16%.

The dividend was lifted 14%, although it solely means a yield of 1.3% on the day past’s shut price. Nevertheless it’s rising properly. And the agency additionally returned £250m by buybacks within the yr simply ended.

Auto Dealer may not pay a lot in dividends proper now. However a strongly progressive dividend coverage can imply quite a bit within the years forward.

Dividend coverage

It’s the form of factor that may flip progress shares into money cows, if it might probably preserve going. And it appears like that’s what the board intends.

The outcomes assertion mentioned: “Our capital coverage stays unchanged, with most surplus money generated by the enterprise being returned to shareholders by dividends and share buybacks.“

However ought to we actually be interested by dividends after we take a look at a doable progress inventory purchase?

I reckon it’s by no means too early. All progress shares ought to mature some day, and settle down to supply regular money rewards to shareholders.

And those I believe have the most effective prospects of some day paying huge dividends are those that may entice my progress investing money.

Premium valuation

The largest worry for me, although, comes from the inventory’s excessive progress valuation. Nicely, high-ish, at the least.

Forecasts put the price-to-earnings (P/E) ratio at 26 for the 2024-25 yr, and it will solely drop so far as 23 based mostly on the 2026 outlook. Does that imply there is likely to be an excessive amount of earnings progress already constructed into in the present day’s valuation?

There is likely to be. Progress buyers typically don’t go away a whole lot of security margin once they push costs up. And when an organization like this does flip to slower maturity, we are able to see a short-term price fall.

Dominance

Nonetheless, Auto Dealer’s market dominance does shine.

CEO Nathan Coe instructed us that “Greater than 8 in 10 automotive consumers now use Auto Dealer throughout their automotive shopping for journey and two thirds of consumers solely use Auto Dealer“.

Only a few firms can do greater than dream about having such a commanding place.

So, balancing the potential for earnings progress with the present market valuation, what’s my verdict on Auto Dealer? I reckon progress buyers may very well be making a mistake in the event that they don’t at the least contemplate it.