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Results preview: Will Carsales.Com Ltd’s results drive the share price higher?

Credit: NRMA Motoring and Services

The past six months since Carsales.Com Ltd (ASX: CAR) released its full year results for financial year 2015 have been good for shareholders with the share price climbing around 4%. That’s a pleasing result when compared against the 10% slump the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has endured.

With the share price currently trading at $11.30, the stock is on a trailing price-to-earnings (PE) multiple of 27 times.

A multiple of 27 is significantly above the average market multiple and implies that investors expect the stock to grow earnings at a rate well above the market average growth rate.

Shareholders of Carsales.Com need to monitor the company closely to see that it remains deserving of this premium rating.

Amongst other angles of analysis, this monitoring will involve retesting and rechecking their growth assumptions for Carsales.Com’s business units.

Having achieved revenue growth of 32% to $312 million and earnings per share (EPS) before one-off gains growth of 4% to 41.7 cents per share (cps) in FY 2015, here’s what Carsales.Com’s management have provided in terms of guidance for FY 2016.

Domestic Outlook: domestic trading in the first quarter was solid and the company expects to see this continue throughout the first half. The domestic business remains well positioned for continued growth through the medium to long term.

International Outlook: solid progress has been made in the development of Brazil and South Korea. The group continues to be well positioned for medium and long-term growth in these markets.

Turning now to what the analysts are forecasting and according to data compiled by Morningstar, EPS of 46.2 cps are expected.

Based on this consensus forecast, Carsales.Com is trading on a forward PE ratio of 24.5 times. Needless to say, the group will need to continue to produce above average earnings growth to continue to justify its above average multiple.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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