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Down 29% since August: Is the Carsales.com share price a buy?

It’s been a terrible few months for investors in high-growth finance, technology or healthcare shares. As they have fallen across the board in the US, Europe and Australia.

At home for example leading technology shares such as Wisetech Global Ltd (ASX: WTC) and Appen Ltd (ASX: APX) are now down around 29% and 21% respectively from their August highs. Healthcare leader CSL Limited (ASX: CSL) is also off around 23% from its August share price highs.

Another leading internet business in Carsales.Com Ltd (ASX: CAR) is now down from $16.25 a share in August to $11.47 today, which is a fall around 29%.

The online classifieds business has not released any negative news to the market over that period though, which leaves the question are the shares a bargain. Let’s take a look at a few arguments for and against:

For

  • Carsales has a very impressive track record of long term revenue, profit and dividend growth. This is because its core Australian business carsales.com.au has a big competitive advantage and strong network effect as buyers and sellers of vehicles always gravitate towards the site with the most vehicles, and best prices to buy or sell.
  • EBITDA has grown at a compound annual growth rate of 14.8% over the past 5 years
  • Carsales is forecasting moderate revenue, EBITDA and profit growth in FY 2019 for its core Australian business
  • Carsales is forecasting strong revenue and profit growth for its Brazilian business Webmotors.
  • Carsales is forecasting “solid” local currency revenue and earnings growth for its SK Encar South Korean business.
  • Carsales offers a healthy trailing dividend yield of 3.86% plus full franking credits

Against

  • After the SK Encar acquisition, Carsales now carries net debt of $390 million as at 30 June 2018, on a high leverage ratio of 1.9x FY 2018 EBITDA
  • Carsales faces a potentially tough macro environment in Australia in 2019 as consumer confidence falls leading less consumers to buy new cars. Already, Automotive Holdings Group Ltd (ASX: AHG) has blamed falling house prices for a profit downgrade as dealership sales slow. A lot of Carsales’ revenue comes from dealer advertising.
  • Carsales faces competition from US social media giants with far bigger network effects than Carsales that now let people advertise vehicles for sale for free.
  • Carsales trades on 22x trailing earnings per share, which is not conventionally cheap, although it is 29% off recent highs

As can be seen there are some some strong arguments for and against buying Carsales shares at today’s price. It’s worth some further research at least.

Motley Fool contributor Yulia Mosaleva owns shares of CSL Ltd. The Motley Fool Australia owns shares of Appen Ltd and WiseTech Global. The Motley Fool Australia has recommended Automotive Holdings Group Limited and carsales.com 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 Scott Phillips.

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