Carsales: How did the first half of 2015 fare?

Carsales: How did the first half of 2015 fare?

We recently discussed the prospects for Carsales.com Limited (ASX:CAR) and covered why we had a cautious view coming into the first half result. The company has since reported and we have some details to share following the group’s conference call and meeting with Management.

Overall, we saw a sound result for the first half of the 2015 financial year. Weakness in the first six months from an apparent manufacturer exodus was largely offset by strength in the Private and Dealer services.

Following an increase in staff and marketing costs, Stratton Finance appears to be on track to provide a material contribution to the company’s earnings. Management appear confident that the pricing power can be maintained in the core business, which is a key feature of the site’s network effect.

On a more granular view, performance in Australia has been sound despite a tough economic environment. Whilst we became concerned over falling inventory levels, Management reasoned that the declines reflected quicker sales by dealers and private sellers – we will continue to watch this closely.

Display advertising growth of three per cent was reported as being impacted by some manufacturers removing inventory from the site. The reason noted was Carsales provides too much price transparency in what is a relatively small car market. Yet Management is keen to demonstrate to the manufacturers that the removal of new car brands has not stemmed consumer demand, as interest has subsequently increased in near-new versions of these vehicles.

The remaining divisions, Tyresales and the international sites, are still very much in growth mode, and are not expected to move the needle in terms of profitability any time soon.

In other comments, Management considered that performance in February has been promising, and that profit is expected to grow moderately in the second half of 2015.

All in all, a good result. Perhaps it’s a symptom of a generally expensive market but despite the above points and digging deeper into the businesses prospects, we still believe that the share price is accounting for a higher degree of earnings growth than what we can currently see on the horizon.

Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.