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Why are Carsales.com shares so expensive?

The bubble in bank shares is becoming an article of faith among many analysts and investors. Yet banks are still not the most expensive large companies in the ASX.

Among the most expensive such companies are household names, including Carsales.com (ASX: CRZ), Australia’s leading online car classifieds site, which today has a market cap of nearly $2.3 billion.

After rising nearly 70% in the last 12 months, against a corresponding 16% rise in the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO), Carsales.com shares are trading for 11 times sales, or a whopping 30 times earnings.

That’s the valuation equivalent of a brand new, fully loaded Mercedes. So why are these shares so expensive?

Impressive financials

It’s true that the company has enjoyed tremendous top and bottom line growth in recent years. Sales have climbed from $72.5 million in 2008 to $184 million in 2012. Net profits have risen from $18.7 million to $71.6 million over the same period.

As these numbers indicate, the margins are enviable — clocking in at nearly 40% in 2012. So this is a good business, and what’s more, it’s still a growing one. More recently, in the first half of 2013, sales came in 17% higher and net profits 14% higher than in the corresponding period in 2012.

Move into Brazilian market

Recent developments also include the company’s entry into the Brazilian market, with Carsales.com negotiating a 30% interest in Webmotors SA, Brazil’s leading automotive sales website. (The transaction is likely to be completed in the coming months.)

In a press release, chief executive Greg Roebuck explained that, “Brazil is a highly attractive market with favourable demographics, rising disposable incomes and rapidly growing internet penetration”.

“Automotive ownership is also growing rapidly in Brazil. In 2013 more than 4 million new vehicles are expected to be sold — approximately four times Australia’s total”, he went on to say. “WebMotors is the number one online automotive classifieds website in Brazil and delivers to carsales an exciting opportunity to participate in this market — the world’s fourth largest in car market”.

Carsales.com purchased a near 20% stake in iCar Asia in March of this year as well.

Foolish takeaway

Carsales.com’s growth story is far from over, it seems. The unfortunate thing is, Mr. Market wants you to pay big to get in on it.

Yet there’s another, smaller ASX company you should take note of… a tiny tech company providing a key service to the automotive industry. Intrigued? Don’t miss out! Get all the details right now in our brand-new research report, “2 Small Cap Superstars” — simply click here to download your FREE copy.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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