Shares in digital automotive marketplace company Auto Trader (LSE: AUTO) have risen by over 4% today after it released a highly encouraging trading update.
The company has experienced a stronger-than-anticipated increase in average revenue per retailer forecourt, with consumer services revenue also performing well. Allied to this have been well-managed costs, which have caused margins to increase. As such, Auto Trader now expects underlying operating profit of between £169m to £171m for the full year, which is slightly ahead of current market expectations.
Clearly, this is good news for the company’s investors and looking ahead to the next financial year, Auto Trader is forecast to increase its bottom line by 17%. This has the potential to positively stimulate investor sentiment in the stock following Auto Trader’s share price fall of 6% in the last month.
And while the company has a rather generous price-to-earnings growth (PEG) ratio of 1.8, a 20% rise in its share price would take it to the same level as its three-month high. Given its strong recent performance, this appears to be very achievable.
Brighter future?
Also offering 20% upside is Sainsbury’s (LSE: SBRY). Its deal to purchase Home Retail could prove to be a sound move and has the potential to positively catalyse investor sentiment in the stock. Certainly, it will take time to successfully integrate Argos into Sainsbury’s and to maximise the cross-selling opportunities that are on offer. However, with the potential for considerable synergies, the deal is likely to have a positive impact on Sainsbury’s bottom line – especially since the outlook for the UK consumer remains upbeat.
With Sainsbury’s trading on a price-to-earnings (P/E) ratio of only 11.9, a 20% rise in its share price would require a rating of 14.2. This seems to be highly achievable given Sainsbury’s encouraging medium-term prospects, which alongside the Argos deal include a new pricing strategy that has the scope to boost margins through less price competition with rivals. Therefore, although the UK supermarket sector remains competitive, Sainsbury’s could be a worthwhile purchase right now.
20% upside
Similarly, Burberry’s (LSE: BRBY) strategy of focusing on China and other emerging markets is also likely to pay off in the long run. And with investor sentiment towards Burberry improving in recent weeks despite weakness in China’s stocks, it appears to be at the start of a comeback following its disappointing updates from the latter part of 2015.
While Burberry continues to trade at a premium to the FTSE 100, with it having a P/E ratio of 16 versus around 13 for the wider index, it has traded significantly higher in the past. For example, it would have to rise by 53% to reach its all-time high and with a number of other global consumer stocks trading on P/E ratios of well over 20, there’s at least 20% upside in Burberry over the long run.