New car listings down at Carsales
Shares in Carsales.com have fallen 6% over the past couple of days on concerns about directives from car makers for dealers not to list new cars for sale on Carsales sites. Fuel was poured on the flames by an article that appeared in Fairfax publications on Friday titled Auto makers pull ads from Carsales. The article was based on research published last week by Adelaide stockbroker Taylor Collison showing sharp falls in new car listings, but was given something of an alarmist slant – most particularly in the headline, which suggested that car makers were pulling display advertisements, whereas in fact what they are doing is preventing dealers from listing new cars for sale.
In all, Taylor Collison thinks that new car (in stock) listings are down 28% from this time last year and, given that this doesn't appear to have affected new vehicle sales, the trend is expected to continue. It’s important to keep this in context, however. New cars only accounted for 14% of dealer enquiries in the second half of 2013, a segment that itself accounts for about 45% of revenue, and Carsales may be able to offset some of the impact with its new category ‘new cars for sale’, which creates generic rather than dealer-specific listings for new cars.
There’s also no reason to expect manufacturers to start pulling display advertisments; Carsales has shown it can convert people looking for used cars into people shopping for new cars, and manufacturers won’t want to miss out on these potential customers. However, Taylor Collison did suggest that display revenues might be affected if the removal of new car listings affected visitor numbers to the Carsales sites.
Carsguide and Gumtree appear to have been similarly affected, so there doesn’t appear to be a problem with market share. In fact, Taylor Collison thinks that ‘Carsguide appears to be losing relevance’ and that a June peak in listings at Gumtree, which it believes is due to a recent price rise, may have paved the way for ‘Carsales to move the price lever in its private auto segment’.
Any move in the private segment would come on top of a price rise in the dealer segment, which should already ensure a strong 2014. Taylor Collison has maintained its Hold recommendation on the stock and summed up by saying that ‘in terms of earnings, we still see plenty in the tank to absorb any adverse effects in new cars and display ... although signs of maturity are unmistakable’.
We wouldn’t argue with that, and would note that our original thesis on this company in The hidden value in Carsales on 13 May 13 (Long Term Buy – $9.21) was predicated on long-term earnings growth at least in the high single digits. We still think that more than this should be achievable. BUY.
Note: The Growth and Income portfolio own shares in Carsales.