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Are Carsales shares still a buy?

With the Ltd (ASX: CAR) share price rising by an impressive 60% since the beginning of the year, there’s no doubt Carsales has been one of the star performers on the S&P/ASX 200 (INDEXASX: XJO) during 2019.

The local online car classifieds provider has demonstrated that it can continue to build on its entrenched and dominant position in Australia, providing a protective moat against any market competition, while also very aggressively growing its presence overseas.

Carsales has a relatively high price-to-earnings (P/E) ratio of 31, however that is significantly lower than the other major online classifieds providers in the Australian market: REA group (ASX: REA) (46) and Seek Limited (ASX: SEK) (47). Carsales also pays a healthy fully franked dividend of 2.7%, which is very good for a growth share.

A track record of ASX share market growth

Carsales has an impressive long-term track record of delivering very high shareholder returns. The Carsales total shareholder return (TSR) over the 10 years to October 2019 increased by a massive 364%, compared to only 122% for the ASX 200. That’s almost three times the average growth rate. 

While it is unlikely that Carsales will be able to repeat such a phenomenal performance over the next 5 years, I feel strongly that it is very well placed to continue to outperform the ASX 200.

Local business continues to perform well

Although consumer sentiment has been subdued during 2019, Carsales, which generates most of its revenues from selling classifieds ads on second-hand cars, can actually perform better in more challenging economic times, as consumers often prefer to buy a second-hand car over a more expensive new car purchase.

A big driver in its domestic financial performance has been strong sales of premium listing products, which allows sellers to get larger, more prominent ad slots in more favourable listing positions on its searches.

Carsales has also had a solid start to the FY20 year in Q1 in its Core Australian Dealer and Private businesses. In its Display advertising division, it is anticipating a lift in FY20, despite challenging market conditions.

Overseas market now main engine for growth

During the early part of the last decade, a significant proportion of Carsales’ growth came from the migration of print to online classifieds advertising in the Australian market, and it is this segment where most of Carsales’ revenues come from.

As the print classifieds segment dried up, Carsales was forced to look for other revenue streams, including display advertising, other auto segments such as bikes, boats and caravans, and overseas markets, mainly via acquisitions.

Carsales has refined its skill in acquiring ownership stakes in established overseas businesses. It has developed a proven track record of choosing the right overseas markets to enter and executing well in these markets, and I feel fairly confident that they can continue to deliver on this strategy.

In fact, by FY19, the vast majority of Carsales’ growth came from its overseas operations, in particular its Asian division, which grew by 119%, while earnings before interest, tax, depreciation and amortisation from the Asian region was up 104%.

Its recent acquisition in South Korea, SK Encar (a secondhand vehicle company), grew by 135% in FY19.

Foolish bottom line

Now that Carsales is so heavily reliant on revenues from overseas operations going forward, this does introduce increased risk into its future performance prospects.

It needs to keep growing its overseas operations at a high rate, and there is always increased regulatory and legislative risk in entering overseas markets.

However, with an entrenched local market position, growth in local premium products, and a proven track record in entering new markets, I feel that Carsales is well placed for strong growth over the next 5 years.

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Motley Fool contributor Phil Harpur owns shares in Limited. The Motley Fool Australia has recommended 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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