Carsales – Full Year in Third Gear?
In a recent video blog we discussed that while Carsales is a high quality business, we felt the growth profile implied by the share price at the time was quite optimistic. Our thesis remains unchanged following the release of their 2015 full year result.
Carsales generated modest growth across the core business in 2015. Car manufacturers are returning to the site, but they are demanding more parameters with their ads as they adjust to a world of increased price transparency. Importantly, Carsales remains a necessary selling tool for dealers, as the site received minimal resistance from a modest price increase in April. While Gumtree appears to be a more competitive threat than CarsGuide, particularly in the cheaper end of the used car market, we think that Carsales should remain the clear leader, though a return to double-digit earnings growth is unlikely in the core division.
Carsales spent considerable time and resources integrating Stratton Finance during 2015, and this should result in a material earnings uplift in 2016. Now that the financial division can handle a substantial increase in leads, management is focused on improving conversion. The investment is important for Carsales’ long-term growth prospects as it allows for a more sustainable relationship with the customer, which means Carsales can selectively re-engage when a car is due for a service or an upgrade.
The development of the international investments is still in their infancy, with the Brazilian and South East Asian interests requiring considerable investment during the year. The Korean venture seems to be the most advanced, and management is optimistic of its contribution to earnings in 2016. Consistent with their strategy of expanding into markets with large, internet-literate and mobile populations, Carsales also announced an investment in Mexico’s second largest car listing site.
So all-in-all, the result was consistent with our original thesis. While we will be taking a closer a look at the potential of Stratton Finance and the Korean investment, we do not consider the recent share price weakness has presented a buying opportunity.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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david klumpp
:
Roger, I agree with Zoran, I have been looking forward to the teams views on the recent reports for high quality companies that the funds hold, or have commented on positively here (SEK, IRI, IFM…).
Roger Montgomery
:
Thanks David, We’ll get onto those once reportings eason is over. In the meantime it might be worth re-reading: http://rogermontgomery.com/is-the-tv-your-investment-strategy/
Sam
:
“Similar but different” space – the P2P car market. Interested to hear whether you’ve looked into Collaborate Corporation (CL8) and their attempt to become the CarSales of the rental world?
The peer to peer space in general is doing very well internationally with the likes of Uber and AirBnB blazing the trail. I know there are already a few other non-listed competitors, but CL8 seems to have the most momentum at the moment.
Interested to hear your thoughts.
Roger Montgomery
:
Yes, the sharing economy is booming.
zoran arnautovic
:
Roger, You and David have for couple of years written how bad MND and other mining services are doing. Nothing new there. I ,for one ,would rather read on some of Montgomery Funds biggestt holdings ANZ and SEK ,now that their reports are out. Best
Roger Montgomery
:
Great Zoran. We still have to review our previous calls. Will come back to you shortly. Stay tuned.