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Where to from here for the Carsales.Com Ltd share price?

The Carsales.Com Ltd (ASX: CAR) share price has recovered from being down 7% in early trading to actually be 3% up at $12.75.

But where is it headed in future?

Much of that will depend on the company’s international automotive classifieds websites, with growth in Australia stagnating. Today Carsales reported a 10% increase in revenue, but International revenues were up 54% for the 2016 financial year (FY16) compared to last year.

Underlying net profit was up just 9% to $154.4 million – not exactly strong growth for a company trading on a P/E ratio of over 27x. It’s the second year in a row that the company has delivered high single digit growth – after reporting 8% growth in FY15.

Domestic revenues were only up 10% in FY16 with weak growth in finance and related services, display revenue and Data, Research and Services. That’s despite a big lift in automotive inventory in 2016 compared to last years.

Carsales FY2016 results

Source: Carsales.com Ltd

The good news is that rivals like the free Gumtree site, Carsguide and Carpoint are making very little impact on private listings – which rose 12% to 86,000 cars by the end of June 2016. Private revenues were up 19%, but that also includes strong revenue growth from Tyresales, B2C and Redbook Inspect.

The outlook domestically is for yet another year of ‘solid’ revenue and EBITDA growth.

Looking at the international business, Carsales holds varying levels of automotive classifieds in Mexico, Brazil, Chile and South Korea. The company also holds 20% of iCar Asia Ltd (ASX: ICQ) which operates in Malaysia, Indonesia and Thailand.

Carsales says it expects good growth from Brazil, solid revenue and earnings growth from Korea and ongoing investment into Chile and Mexico to ‘provide a solid uplift in revenue and earnings in the coming year’.

Foolish takeaway

The concern is that the company’s Australian business has plateaued as it has matured and that further double digit growth is unlikely. The roll out of additional services and offerings like Redbook Inspect and Tyresales has probably been a driver of growth in the past few years. That makes the international division much more important for future growth – but at this share price, looks expensive.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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