Carsales.com: AGM 2015

Carsales.com held its annual general meeting on Friday. We didn't attend the meeting itself but, if you did, we'd be keen to hear your thoughts in the comments section below.

All appears to be track for 2016 so far, with the company highlighting that domestic trading has been 'solid' in the first quarter. Some of the market strength will be due to the 'wealth effect', with the strong Sydney and Melbourne housing markets almost certainly helping vehicle sales.

Sales of new cars in Australia have risen 3.6% in the nine months to September 2015, putting the total market on track to record its third year of sales in excess of 1.1m cars a year. Vehicle turnover is positive for Carsales.com, whether sales are new or used.

You can expect another decent year from the Dealer revenue segment ($113m of revenue in 2015). Premium advertising products continue to do well, and the company is reporting that new car inventory has recovered slightly as some manufacturers return inventory to the site (we discussed the move by some manufacturers to remove inventory in Carsales: Interim result 2014 from 26 Oct 14 (Hold – $10.48)).

Less obvious is what will happen with Private revenue this financial year ($43m of revenue in 2015). Growth in the second half of 2015 slowed to just 1%.

By now you'd expect management to be considering another price increase for private listings. In December 2013 the company lifted the price of a standard ad from $60 to $65, so another increase to $70 might not be far away.

However Carsales.com might forego that to forestall the free sites taking share, especially given the slow growth in the second half of 2015. The dealer- and News Corporation-backed Carsguide and Gumtree offer free ads and, while the evidence is they aren't denting Carsales.com's listings significantly, they need to be kept in check.

Is 'free' too expensive?

Of course, car buyers are aware that free can be too expensive. It's a bit like those handwritten 'For sale' signs you see in some vehicle windows. If the owner is so stingy that they won't spend $65 to put their ad in front of the largest number of buyers, what else have they skimped on?

This year the benefits from the Stratton car finance acquisition should also become clearer. Management has reported that Stratton has performed above expectations, but it required investment in its cost structure during the first year of ownership. 'Strong growth' is expected in 2016.

It's a bit early to say much about the likely 2016 performance of the international arm. Despite difficult economic conditions in Brazil and an outbreak of Middle East respiratory syndrome in South Korea in the 2015 financial year, each business performed well. Carsales.com reported 'solid progress' from both divisions at its annual meeting. The company doesn't expect a material contribution from its recent Mexican acquisition in 2016, although the end game is probably the acquisition of another player in that market.

We continue to expect Carsales.com to deliver earnings per share of 44-45 cents in 2016, placing the stock on a forecast price-earnings ratio of 22. That's very reasonable for a company of this quality and cash-generating ability.

The stock has fallen 5% since Carsales: Result 2015 from 12 Aug 15 (Buy – $10.26). While this reflects ongoing disappointment that earnings growth has been tepid for a year or two, the price takes it into account. BUY.

Note: Our Growth Portfolio and Income Portfolio both own shares in Carsales.com.