3 reasons to add Carsales.Com Ltd to your watchlist

It would be fair to say that investors generally are aware that Carsales.Com Ltd (ASX: CRZ) is a high quality business, with impressive margins and good growth prospects. The reason this can be said with little doubt is because the stock is trading on a hefty forward multiple of 23.5x – this high multiple can be viewed as acknowledgement by the market that is a top stock.

So while Carsales.Com doesn’t look cheap, with earnings per share expected to grow by 18% in the current financial year, the multiple could well be justified. With that in mind, here are three reasons the stock deserves a place on your watch list.

  • Carsales.Com holds a 22.9% shareholding in iCar Asia Ltd (ASX: ICQ). Unlike its domestically focussed peer, iCar Asia is yet to earn significant profits, this makes valuing the stock more difficult. Risk adverse investors would shy away from investing directly in iCar Asia, however gaining exposure to what could be a major growth business via Carsales.Com’s shareholding appears an attractive alternative.
  • Carsales.Com recently announced that it had acquired a 50.1% controlling interest in Stratton, a vehicle finance company for $60.1 million. Stratton provides financing and insurance solutions for cars, boats, equipment and more. This looks to be a clever use of shareholders’ funds as it expands Carsales.Com’s reach into a parallel business which it can cross-sell to its customer base.
  • Carsales.Com is often compared with leading online real estate portal-owner REA Group Limited (ASX: REA). REA is a great business too, however it does reportedly face issues with a disgruntled real estate agent client base who could ultimately choose to take their business elsewhere. In comparison, Carsales.Com would appear to have fewer competitive threats thanks to the large number of private car sellers which reinforces its network effect.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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