Report
Gareth James
EUR 850.00 For Business Accounts Only

Morningstar | Carsales.com Looking Undervalued Following Global Technology Stock Sell-off

Narrow-moat-rated Carsales.com looks undervalued following the recent global technology stock sell-off, with the current market price of AUD 12.30 meaningfully below our AUD 14.50 fair value estimate. Despite the share price weakness, the company continues to dominate the online automotive advertising market in Australia and is strengthening its business via domestic diversification and international expansion. The potential threat from companies like Facebook and Gumtree is not materialising in the way it theoretically could which we attribute to the depth of information and number of listings on carsales.com.au and associated network effect. Over the next decade, we expect the company to grow EPS at a CAGR of 11%.

We have adjusted our fiscal 2019 earnings forecasts slightly, following new guidance at the annual general meeting. However, our changes are too small to impact the fair value. As usual, guidance was a little cryptic, with the domestic dealer and private business, which comprise 55% of group revenue, delivering a "solid" first quarter. We have maintained our full-year revenue growth forecast at 8% for the dealer division which is in line with growth rates achieved in recent years and maintained our 15% revenue growth forecast for the private division, below the 24% CAGR over the past three years which was boosted by price rises and up-selling.

We have cut our fiscal 2019 revenue growth forecast for the display advertising business, which comprises 15% of group revenue, to 2% from 5%, following management comments that trading has been disappointing in the first quarter. However, we’ve maintained growth rates in later years at 5% as we expect weakness is cyclical. We’ve also cut our revenue growth forecast for the finance division, which comprises 16% of group revenue, to 3% from 8% as the business is being impacted by credit tightening following the Financial Services Royal Commission. Management expects "moderate" growth, skewed towards the second half in fiscal 2019 which we consider to be in line with our revised forecast.

Although we don’t doubt credit tightening is an issue, we’ve long held the view the finance division lacks an economic moat and is outside of Carsales.com’s core area of expertise to some degree. The company clearly has a strong ability to generate finance leads but owning a finance broker may not be the best approach to monetisation. Since being acquired, the division has experienced a number of issues but its relatively small size means we’re not too worried about its potential negative impact on the group and we still forecast a 6% revenue CAGR over the next decade for the finance division.

Pleasingly, management described the first-quarter performance of the international businesses, which comprise around 9% of group revenue, as "good" with "strong" local currency revenue and earnings growth expected in fiscal 2019. International comprises a range of businesses in different geographies and we expect revenue growth rates of around 30% for most, albeit off a relatively low base, and we consider our forecasts to be in line with "guidance."
Underlying
Carsales.Com Limited

Carsales.com's principal activities consists of: online advertising services, which include classified advertising and display advertising services; data and research services, which include software, analysis, research and reporting, valuation services, website development and hosting as well as photography services; finance and related services, which include the Stratton Finance Pty Ltd subsidiary that provides finance arrangements for vehicles, boats, and other leisure items, vehicle procurement and other related services to customers; and international services, in which Co. has operations in overseas countries through both subsidiaries and equity accounted associate investments.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Gareth James

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