A False Start with Carsales’ Result
Carsales (ASX: CAR) announced solid growth in its core business for 2016, yet it was news concerning its rival CarsGuide that initially caught the market’s attention. Carsales’ full year 2016 result coincided with reports that News Corp was selling its 50 per cent stake in CarsGuide to Cox Automotive. CarsGuide is a distant rival to Carsales, and it’s actually Gumtree who’s posing a more competitive threat to Carsales in Australia by offering free ads to private sellers and gradually enticing dealers onto its site.
Carsales’ share price opened 7 per cent lower on the announcement of the merger. Yet our initial thoughts echoed the sentiments of Carsales management, who on the FY16 conference call described News Corp’s ownership as “CarsGuide Version 4”, and considered Cox Automotive’s ownership as “CarsGuide Mark V”.
This isn’t to dismiss the entry of another well-funded player as insignificant, particularly since Cox Automotive is reportedly keen to significantly increase its penetration in Australia. We’re just highlighting that it’s very hard to dislodge the number one player in a market with strong network effects.
Carsales’ share price recovered to close higher on the day, perhaps as the market focused more on the strong growth Carsales achieved in its core division (courtesy of the value its platform provides to users).
We’re looking forward to meeting with management to discuss the result and will be sure to share our thoughts as they evolve on the dominance of Carsales’ position.
The Montgomery funds owns shares in Carsales.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.