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Why Carsales.Com Ltd is in reverse despite posting profit and dividend growth

The share price of Carsales.Com Ltd (ASX: CAR) has failed to zoom ahead with the broader market rally even after management posted an increase in sales, earnings, and dividends.

The stock retreated 0.1% to $14.35 in morning trade after rising as high as $14.82 when the online automotive classifieds company posted a 12% increase in interim revenue to $200.1 million and an 11% uplift in underlying earnings per share (EPS) to 25.2 cents.

Shareholders have also been rewarded with a 10% increase in the first half dividend to 20.5 cents as all of its core domestic businesses delivered growth for the six months to end December.

Its Private classifieds business revenue is up 20%, while its Dealer and Data Services divisions improved 7% each as display advertising managed to grow by 4%.

Carsales.Com’s international business, the growth engine for the group, also recorded good top-line growth as interim revenue surged 23% to $25.1 million.

Management expects the growth momentum to carry over to the second half, which implies that Carsales.Com should have little trouble meeting FY18 consensus expectations with analysts tipping full year revenue of $428.5 million and EPS of 55.34 cents.

The outlook commentary should go some way to comfort investors who were concerned about a possible backlash from car dealers after Carsales.Com raised its prices for generating sales leads.

So why the sad face for Carsales.Com? The stock should be in the fast lane with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) bouncing 1.5% and its fellow online disruptors zooming ahead. REA Group Limited (ASX: REA) is up 2.7% at $72.29, while SEEK Limited (ASX: SEK) is 1.6% ahead at $19.49.

However, Carsales.Com may be a victim of its own success. It isn’t enough to just meet expectations after it surged 43% over the past 12-months, which is ahead of SEEK and REA as their stock delivered a 30% plus gain.

Also, the interim result points to margin pressure as its earnings before interest, tax, depreciation and amortisation (EBITDA) only grew 9% to $90.6 million.

Furthermore, investors may be standing aside as they wait for more evidence that its overseas investments in South America and South Korea can stand up and deliver.

Carsales.Com could also be a victim of “buy the rumour, sell the fact” and may come bouncing back as its price/earnings of 23 times for FY19 doesn’t seem overstretched if management can continue to deliver double-digit growth in the business.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended carsales.com Limited, REA Group Limited, and SEEK Limited. 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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