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Should you buy Carsales shares?

The Ltd (ASX: CAR) share price has stormed 55% higher over the past year, which has far exceeded the S&P/ASX 200 (INDEXASX: XJO)‘s return of 19%. The company is a well known online marketplace for buying and selling vehicles.

Reasons for Carsales’ outperformance

In its 2019 full year results presentation, Carsales delivered revenue growth of 11% to $418 million, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of 7% to $210 million and adjusted net profit after tax (NPAT) up 3% to $131 million.

A large contributor to Carsales’ revenue growth is the success it is having in its Asia division. Revenue has increased 119% from $29.7 million in FY18 to $65.1 million in FY19. Even more pleasing is the fact this division has increased its adjusted EBITDA by 104% from $15.7 million in FY18 to $32.0 million in FY19. The continued investment in the company’s South Korean acquisition (SK Encar Group) has helped drive the solid top and bottom line growth.

Carsales Latin America delivered revenue growth of 11%, but its losses have widened by 130%. In its 2019 annual report presentation the company comments that these losses reflect its “ongoing investment in Mexico and Argentina” . This division achieved revenue of $9.1 million in FY19 compared to $8.2 million in FY18 and adjusted EBITDA was -$2.6 million in FY18 compared to -$5.9 million in FY19.

The Latin America division will take time to become profitable as the company is investing to grow the business. Nevertheless, the global expansion is having a positive effect on the company’s earnings overall, offsetting weakness in the Latin America division. There remains considerable growth opportunity in overseas markets. The company states there are “7x more cars sold in our international markets than in Australia.”

I’m pleased the company is investing in global markets. Geographic diversification will benefit Carsales in times of domestic weakness and be a strong driver of future growth, particularly considering the number of cars sold around the globe is significantly higher than those sold in Australia.

Carsales is positioned to be able to benefit from changing consumer interests and tastes. The company states that it “provide[s] a clear comparison between all of the available vehicle types and technologies in the market, whether new or used, fossil fuel, electric or hybrid.” 

Foolish takeaway

Despite profit weakness in Latin America, Carsales is performing nicely and its Asian division looks to be the main driver of potential explosive growth in the company earnings, both now and into the future. I believe the market is appreciating this potential – the Carsales share price has rewarded shareholders by trading at $17.81 per share at time of writing, which is just shy of its 52-week high of $17.95.

As Carsales is trading near a 52-week high, shareholders may benefit from buying the dips. In the meantime, income investors looking for growth in their dividends would be pleased to know Carsales has consistently lifted its dividends.

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Motley Fool contributor Matthew Donald has no position in any of the stocks mentioned. 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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