Is Carsales.Com Ltd a good buy at today’s share price?

Source: Wikipedia

Online classifieds titan Carsales.Com Ltd (ASX: CAR), best known for the eponymous website, has long been a favourite of investors looking for growth. Indeed, the company’s past performance speaks for itself.

But is Carsales still a decent investment today? The company looks to trade on an estimated full-year Price to Earnings (P/E) ratio of 26, which is substantially more expensive than the market’s 15x. Yet Carsales grew profits by 8% last year, and looks likely to achieve a similar performance this year. At this rate, it will take around six years to bring Carsales’ P/E down to the market average.

That’s assuming the company can keep growing at its present rate, with competition from the likes of Gumtree – owned by Ebay – intensifying. We’ve all seen it before; popular free website attracts buyers and sellers, a growing, vibrant market attracts more buyers and sellers, marketplace operator can use this ‘network effect’ to monetise its product and hey presto, you have the next Carsales, or REA Group Limited (ASX: REA).

Worried about competition?

Gumtree’s competitive offering seems to be improving. Yet by specialising in a key product – automotive classifieds – Carsales has a significant leg-up on Gumtree which lacks Carsales’ parallel investments in vehicle finance, data and analytics, vehicle inspection and tyre sales.

Carsales also has its rapidly growing businesses in Chile, Mexico, South Korea and Brazil, as well as Indonesia, Thailand and Malaysia through its stake in iCar Asia Ltd (ASX: ICQ). However, with the Australian businesses generating virtually all of the cash, investors should focus on this area when considering Carsales’ potential.

A one-stop shop

Strong growth in revenue from private listings (up 15%) and financial services (up 17%) revenue during the past half suggests that Carsales still has a very effective customer offering, while diversification efforts and further development of the online/mobile offerings should continue to drive cross-selling opportunities and user numbers.

In recent times Carsales looks to have been building a platform for everything automotive sales-related, with inspections, tyre sales, vehicle finance, vehicle data, and the classifieds themselves all targeting the natural parallel needs of customers and car dealers. A car is a significant asset, and one more likely to attract a significant amount of thought and research from consumers. Sellers remain happy to pay a small fee for a quicker sale of their vehicle. Carsales’ variety of tools makes it substantially easier to buy and sell a car, in addition to the formidable customer draw-card of being a one-stop shop.

But the price?

There’s no escaping that Carsales is priced for growth. If growth slows from here, competition intensifies, or margins decrease as a result of increasing sales in lower-margin businesses like Tyresales, investors could see shares take a haircut.

Yet over the longer term, Carsales’ Australian business appears to be in a good position, with a number of levers available to keep its number one spot in the market. Specialisation, highly experienced management, and a number of channels for engaging customers give it a significant advantage over generalist Gumtree – and Carsales is already well and truly the market leader among other automotive classifieds websites. Over the longer term, Carsales also has its international businesses in a number of markets significantly larger than Australia.

As a result I conclude that although Carsales doesn’t look cheap today, its long-term potential is intact.

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Motley Fool contributor Sean O'Neill owns shares of Limited and iCarAsia Limited. 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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