Is Carsales.com Cheap Or Expensive?

This story features SEEK LIMITED. For more info SHARE ANALYSIS: SEK

By Chris Shaw

The FNArena database shows Carsales.com ((CRZ)) is rated as Buy twice and Hold four times, most of the neutral views reflecting what brokers see as a stock trading around fair value at current levels. As RBS Australia noted post the full year earnings result in August, while earnings growth should remain strong this is already priced into the stock at current levels.

Looking at the fact that the shares are currently trading on a forward earnings per share multiple of 20, this argument still seems valid.

At Perth-based DJ Carmichael, however, the analysts dare to differ. They argue using the earnings multiple to assess value in Carsales.com is not the most appropriate measure. This is because strong earnings growth of at least 20% per annum should continue for the next three to five years. This will bring the stock's earnings multiple down from more than 20 times at present to an estimated 13.7 times in FY13 on the broker's forecasts.

What will drive earnings growth for Carsales.com, according to Carmichaels, is ongoing migration from print to online advertising. This migration is all but assured in the broker's view given the internet offers advantages compared to print media, as both buyers and sellers can interact and view items available for sale.

The other advantage Carsales.com has in the view of Carmichaels is a dominant market position, thanks to brand recognition created by being the first-mover in the sector. This means there are barriers to new entrants attempting to enter the market going forward.

Online classifieds for cars, boats and motorbikes are a less developed market, with Carmichaels noting only around 22% of total expenditure for such classifieds currently occurs online. Given the market position enjoyed by Carsales.com, the broker expects the company will capture a disproportionate share of any increase in revenues as the market continues to expand.

This offers scope for better relative performance for Carsales.com than for the likes of employment classifieds group Seek ((SEK)), as Carmichaels notes about 43% of employment classifieds expenditure is now spent online, compared to only 22% in the auto and boat market.

As well, growth should be stronger for Carsales.com than for Seek given the different size of the two companies. A dominant market position has helped push Seek to a market capitalisation of around $2.5 billion, this larger size meaning it is more difficult to extract higher comparable growth rates when compared to the near $1 billion market capitalisation for Carsales.com.

In terms of forecasts, DJ Carmichael expects earnings per share (EPS) of 23.4c in FY11 and 28.1c in FY12, which compares to the 18.5c generated in FY10. By way of comparison, consensus earnings estimates for Carsales.com according to FNArena stand at 23c in FY11 and 27.5c in FY12.

The FNArena database shows an average price target for Carsales.com of $5.40, which implies share price upside of around 9% from current levels. Shares in Carsales.com today are slightly higher and as at 11.05am the stock was up 7c at $4.97. Over the past year the shares have traded in a range of $3.79 to $5.86.

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