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The Carsales.com share price is up 40% this year. Is it a buy?

The share price of Australian online automotive classifieds business carsales.com Ltd (ASX: CAR) surged a little over 5% higher to $15.75 on Friday afternoon. Despite trading slightly lower this morning at $15.68, the company’s share price is up over 40% so far in 2019. It is currently within striking distance of the 52-week high of $16.37 it reached back in early September. 

Friday’s share price jump came after the company released its 2019 AGM presentation to the market. Although the presentation provided a detailed snapshot of the company’s many positive FY19 achievements, the market was probably more likely reacting to the company’s optimistic economic outlook for FY20.

It stated that it expected a recovery – albeit a “gradual” one – in Australian automotive market conditions brought about by lower interest rates and an improved lending environment. While the outlook was short on firm figures, the company stated it expected growth in Group revenues, adjusted earnings before interest, depreciation and amortisation (EBITDA) and adjusted net profit after tax (NPAT) to be “solid”.

Shareholders will be hoping this means at least a repeat of the company’s FY19 growth numbers. Last financial year, carsales’ Group revenues jumped 11% higher to $418 million, while adjusted EBITDA climbed 7% to $210 million and adjusted NPAT was up 3% to $131 million. Although this meant overall Group EBITDA margins contracted, the company’s core domestic business actually delivered EBITDA margin expansions as cost control measures resulted in improved economies of scale. However, this was offset by the dampening effects of increased investments in its other domestic businesses (such as tyresales) and costs associated with growing its international presence in Asia and Latin America.

Shareholders won’t be too worried about the effects of its international ventures though, as they have so far translated into strong revenue growth, particularly in Asia. Revenues for carsales Asia surged 119% higher to $65.1 million in FY19, while EBITDA from the Asian region was up 104% to $32 million – meaning it accounted for a sizeable 15% of adjusted EBITDA in FY19.

The reason this is particularly pleasing for shareholders is that it demonstrates the scalability of the company’s business model. While carsales has grown into the market leader in online automotive sales in Australia, international expansions are risky for a whole host of reasons. Any number of regulatory, legislative, competitive or even cultural factors can mean that a business model that is profitable in Australia does not translate well overseas.

Its FY19 result shows that carsales can be successful internationally, which opens up a variety of new potential revenue streams and also means the company is less dependent on local market conditions.

Foolish takeaway

This year has been an incredibly strong one for carsales. The company has demonstrated that it can continue to build on its dominant market position in Australia while simultaneously growing its presence overseas. Carsales has proved it has the ability to grow into a digital blue chip company in a similar vein to REA Group Ltd (ASX: REA), which operates the property website realestate.com.au.

Comparisons to REA Group aren’t unwarranted, as broadly similar economic drivers affect each company and their primarily digital-based businesses are also quite closely aligned. They also both occupy market-leading positions in their respective sectors in Australia. However, REA Group shares currently trade at a lofty multiple of almost 140 times FY19 earnings, while carsales shares trade at just 45 times FY19 earnings. This means that even at current prices, carsales shares may still offer great value to new growth investors.

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Motley Fool contributor Rhys Brock owns shares of REA Group Limited. The Motley Fool Australia has recommended carsales.com Limited and REA Group 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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