Carsales upgraded to Buy
Recommendation
The decision by new car makers including Holden, VW, Nissan, Honda and Suzuki to instruct dealers not to list new cars on Carsales.com has continued to weigh on sentiment towards the stock, driving the price down 9% since we downgraded to Hold in Carsales goes for a spin on 28 Oct 13 (Hold – $10.24). But with the stock now firmly below our $10 guide, we're upgrading again to Buy.
The concerns are not unfounded. For one thing, the car maker action demonstrates that there are some big fish in this market – it's not a problem REA Group has to face from homebuilders for example. There's disagreement over the effect the car makers' actions may have on their sales, but if other car makers follow suit, then this source of revenue is obviously at risk. And, while it only amounts to 7% of the group total, it had been touted as a growth area. New car listings also help draw visits to Carsales' sites, so there could be an indirect impact on used-car and display advertising revenues through slower growth in page impressions. Naturally Carsales is working on products to maintain revenues while allaying car maker concerns.
We'll have to wait and see what comes of all this, but we're confident that Carsales will be able to take advantage of the latent pricing power within its core used-car business over the longer term. And with the stock now offering a price-earnings ratio of about 23 based on forecast 2014 earnings per share of around 41 cents, and 19 for 2015 (based on EPS forecasts of 48 cents), alongside free cash flow yields of about 4.2% and almost 5%, the price now more than compensates for the uncertainty. BUY.
Note: Our Growth and Income portfolios own shares in Carsales.com.