The FTSE 100 is filled with large-cap shares that still have ample room to grow. And when the next bull market comes around the corner, I want to be ready for it.
My favourite type of share offers high-quality attributes. For instance, rising profits, double-digit profit margins and solid balance sheets. In addition, they tend to operate stable businesses with a large share of the market.
Driving profits forward
One Footsie share that meets my criteria is Autotrader (LSE:AUTO). This vehicle marketplace first established its brand in a printed magazine format. But it has evolved over the years and in 2013 it became a 100% digital business.
Sales and profits have more than doubled over the past decade. And its steady growth could continue for many years, in my opinion. For the financial year that ended in March, sales rose 14% to £571m and pretax profit gained 18% to £345m.
A chicken and egg challenge
One reason why I think this could be a long-term winner is due to its enviable business model. A marketplace business can be difficult to establish, which could prevent new entrants from competing.
For instance, potential buyers will visit an online marketplace if there are plenty of vehicles for sale. But sellers might be reluctant to pay listing fees if there aren’t enough buyers. This chicken and egg challenge is what could allow Autotrader to keep its dominant market position for some time.
Unlike the car dealers that list on its site, Autotrader isn’t capital intensive. This allows it to earn a phenomenal 60% return on capital employed. Apart from a short-term blip around the pandemic, it has managed to maintain high levels of profitability too.
I’d note that Autotrader isn’t just an online marketplace. Much like property marketplace Rightmove, it has sight of unique industry data. In fact, it uses its vehicle and market data to provide various tools, portals and reports to individuals and industry customers.
A changing world
The business isn’t standing still. It recently purchased Autorama, which is one of the UK’s largest marketplaces for leasing new vehicles. Looking ahead, as the market for electric vehicles continues to grow, leasing cars could become more popular.
The industry faces some challenges that Autotrader will need to manage through. For instance, the market for electric cars could change the way customers interact with manufacturers and sellers. After all, newer operators like Tesla tend to deal directly with consumers.
As an online business, Autotrader also faces cybersecurity risks. Any material attack on its site that leads to downtime could lead to a negative impact on its business. It’s a key risk for many web-focused companies.
My new favourite FTSE 100 share
Overall, this £8bn FTSE 100 share is innovating, growing and seems to be doing so steadily and responsibly. Given its rising profits, its price-to-earnings (P/E) ratio of 25 appears reasonable value, in my opinion.
I think I’ve just found my new favourite FTSE 100 share. If I had spare cash in my Stocks and Shares ISA, I wouldn’t hesitate to buy it today for a long-term hold.
This post was originally published on Motley Fool
