Why you should buy Carsales.Com Ltd instead of Automotive Group Holdings Ltd

Credit: NRMA Motoring and Services

According to data released by the Australian Bureau of Statistics this morning, new motor vehicle sales dropped by 0.1% last month. The drop to a seasonally adjusted 97,921 came as a surprise to economists who were expecting a rise of 1.4%.

This could prove to be bad news for Automotive Group Holdings Ltd (ASX: AHG). Australia’s largest car dealer increased its profit by 7% in the first half of the current financial year thanks to a booming car market which saw record new car sales. But this growth could now be coming under pressure.

What makes this data especially worrying for shareholders is the fact that the company’s automotive segment currently produces 81.4% of the company’s revenue. Such reliance on a single market can be extremely detrimental when the market starts to slow.

It is because of this that I think investors would be better choosing Carsales.Com Ltd (ASX: CAR). Its exposure to markets all over the world should protect it to a degree from any slowdowns in the Australian market in the future.

Asides from the protection, the collective population of the countries Carsales has exposure to is almost 750 million and growing at a tremendous pace. I believe these markets give Carsales the potential to grow to many times its current size in the next decade.

Additionally, the increase in new car sales which we have seen in the last few years should eventually become a boom for the used car industry. I believe that Carsales will be better positioned to capture the majority of these listings when they come to market.

Carsales shares do not necessarily come cheap at 26x earnings. Like fellow growth shares REA Group Limited (ASX: REA) and SEEK Limited (ASX: SEK), they trade well above the market-average of 16x earnings.

But I feel this is justified when you consider the 11% per annum earnings growth that analysts are expecting for the next two years, according to CommSec.

Automotive Group Holdings may still provide shareholders with decent gains in the future, but I believe these will be dwarfed by the long-term gains that Carsales produces. For this reason, I strongly believe that Carsales is a far better investment than Automotive Group Holdings.

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Motley Fool contributor James Mickleboro 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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