First mover advantage means Carsales.com (ASX: CRZ) operates a dominant market position in the online classified markets for cars, boats and motorbikes. It is the place to advertise your vehicle for sale or, conversely, it's where you find your next purchase.
Classified advertising is the major product offering of the company and encompasses both private sellers and dealer customers. Carsales also provides display advertising for corporate customers in areas of automotive retail, finance and insurance. Carsales offers a tailored group of interested vehicle owners, or potential owners, to advertisers. Thus vehicle vendors can target their potential customers much more effectively than through traditional print and TV media. It is now exploiting this strength by adding more services to deliver greater functionality, to increase its reach and appeal to the market. It also provides data and research services.
Just as Seek (ASX: SEK) is the market leader for job search and REA Group (ASX: REA) is the leader for house sales, Carsales dominates online vehicle sales. Similarly to Seek and REA Group, expansion via international operations is starting to materialise for Carsales. In FY2013, Carsales made investments in ICar Asia (ASX: ICQ), which operates car classified businesses in Thailand, Malaysia and Indonesia. The same year it bought a 30% shareholding in the Brazilian company Webmotors. Carsales CEO and Managing Director, Mr Greg Roebuck said this association "represented a significant opportunity… Brazil is a highly attractive market with favourable demographics, rising disposable incomes and rapidly growing internet…." Brazil is the world's fourth largest car market.
Overall, the second half of FY2014 has commenced well with January again proving to be an attractive month for car buyers in Australia. Numerous strategies are underway to expand the new vehicle marketplace, with some positive early results. It is anticipated that a number of product developments will be released over the coming months. Emphasis is on innovation in expanding markets both locally and overseas.
This company is growing steadily. Earnings per share for the year ending June were 24.4 cents for 2011, 30.5 for 2012 cents and 35.2 cents for 2013. Expected figures are 40.2 cents for 2014 and 47.4 for 2015. It is noteworthy that return on equity for the last three reported years has been 54%, 56% and 55%, showing excellent use of shareholders' funds.
Foolish takeaway
Carsales has a great track record of steadily growing earnings per share. It has a lot further to progress as it penetrates local and overseas markets. Locally there seems no serious competitive threat, so expansion here should be plain sailing. However, overseas it will need to expand by purchasing appropriate websites or adding to purchases of partly held companies. With a price to earnings ratio of 30 times it compares favourably with Seek's ratio of 35 and REA Group at 46.
If there is a market pull-back due to current geopolitical events over the next few weeks, then it would be an opportune time to buy shares in Carsales. Although currently selling for $11.50, I recommend that the wise long-term investor be prepared to make a purchase at $9.50.
