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Where to next for the Carsales.Com Ltd share price?

With Carsales.Com Ltd (ASX: CAR) expected to report its results in the 2nd week of February, there are a number of things investors should watch closely, given the developments at the company in recent times:

New CEO

With founder and 20-year CEO Greg Roebuck stepping down, investors should prepare for the changes that could come with the appointment of incoming CEO Cameron McIntyre. A 9-year veteran of Carsales, Mr McIntyre – currently Carsales Chief Operating Officer (COO) – will formally commence on 17 March, although the company is already preparing for the transition.

New leadership always brings the potential for change, although as COO Mr McIntyre already has significant input into the operation of the business and drastic changes are unlikely.

iCar Asia

Carsales recently squashed media speculation that the company might seek to either takeover or divest its ~20% shareholding in iCar Asia Ltd (ASX: ICQ), which is a south-east Asian classified company. New CEO Cameron McIntyre was a former non-executive director of iCar and may have his own ideas about the relationship between the two companies.

That said, Carsales takes a very long-term time frame with its own international loss-making classifieds businesses, and drastic changes are unlikely in my view.

Domestic businesses

With the international businesses growing well off a low base, the focus will again be on Carsales’ domestic operations, which account for almost all of the company’s earnings. A recent update reported that core business (Australian classifieds) performance was ‘solid’, which in the past has meant modest single-digit earnings growth. Related segments such as Tyresales and Redbook continue to gain scale, although the Financial Services segment was performing below expectations.

The expansion into parallel segments has been an investment in less profitable, more capital intensive, and more competitive businesses, with the hopes of leveraging the Carsales online portal to drive sales of tyres, vehicle inspections, car loan products, and similar.

While a sensible expansion for a mature business, Carsales does need to ensure that these businesses are up to scratch, since this appears to be where most of the growth is coming from – at least until international businesses grow up enough to pick up the slack.

I expect that the market will likely be re-examining its expectations for Carsales over the reporting period, and wouldn’t be surprised to see the share price move sharply in either direction. At its heart, Carsales is a good business with very capable management, and I would love the opportunity to buy shares around $9.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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