With a 27% reduction in the Carsales.Com Ltd (ASX: CAR) share price since the beginning of the current market crash, is now a good time to snap up shares in this market leader at a more favourable price?
Strong recent financial results
Last month, Carsales reported its half-year results for FY 2020. Revenue came in at $214 million, up 5% compared to the prior corresponding period, while adjusted net profit after tax (NPAT) came in at $63 million, up 7% for the half.
Carsales continues to grow its margins, with domestic core business margin expanding from 59.8% to 61.3% in 1H20. Dealer revenue in Australia was up 6% to $79.4 million for the half year, while private revenue was up 7% to $44.3 million.
I think these were fairly solid top-line results amongst challenging market conditions.
Carsales has grown very strongly over the past four years. Between H1 FY16 and H1 FY20, the company's revenue has increased at a compound annual growth rate (CAGR) of 12%. Earnings before interest, tax, depreciation and amortisation (EBITDA) has increased at a CAGR of 9% over the same period.
The company has demonstrated it can continue to build on its entrenched and dominant position in Australia, providing a protective moat against any market competition, despite slowing growth in a relatively mature Australian market.
Carsales' dominant position in the Australian market can be illustrated by the fact that website visitors spend 2.3x more time on the Carsales site than its nearest competitor in Australia.
A big driver in the company's 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.
Overseas markets fueling current and future growth
Most of Carsales' new growth is now coming from its overseas operations, which now represent 23% of look-through revenue and 18% of look-through EBITDA. Revenue increased 13% in Korea during the most recent six-month period, while in Brazil, revenue growth was very strong at 30%.
Carsales continues to refine 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 is executing well in these markets.
Are Carsales shares a buy?
I believe the Carsales share price is now looking very attractive after the current market correction. Carsales shares are trading on a trailing dividend yield of 3.1% at the time of writing, fully franked. Its price-to-earnings (P/E) ratio has dropped significantly and is now sitting around 26. Both of these figures are very attractive for a first-class ASX growth share, with a strong track record.
Although Carsales' Australian operations are now quite mature, they are still growing solidly, and its overseas markets will fuel further strong growth over the next five years. I think this positions the company well for strong share price growth over the medium term.
