Market Leadership A Virtue For Carsales.com

This story features REA GROUP LIMITED. For more info SHARE ANALYSIS: REA

– Full year earnings from carsales.com better than expected
– Company remains well placed to deal with increased competition
– Forecasts lifted post the result
– Brokers remain unanimous with Buy ratings

By Chris Shaw

Consensus forecasts for FY11 net profit for carsales.com ((CRZ)) leading into Tuesday's result was around $56.2 million, so the actual result of $58.3 million was well received by the market. The result was an increase of 35% relative to FY10.

Driving earnings was stronger than expected revenue growth, particularly in the second half of FY11. Dealer and data services was also a key area of outperformance observes Deutsche Bank, while additional investment into the operating platform was largely responsible for limiting margin expansion through the year.

A key feature of the result, according to RBS Australia, was while revenue from dealer advertising was up 16% in FY11, growth from non-dealer ad spend came in at 38%. This now accounts for 53% of revenue for carsales.com and means there is less reliance on dealer advertising as a driver of future revenue growth.

This is a positive in the view of RBS as it means the market position of carsales.com is strong enough to deal with increased competition such as the joint venture between Carsguide and auto dealers.

Deutsche Bank makes a similar argument, pointing out innovation in its product offering is allowing carsales.com to entrench its leading market position. As an example, Deutsche notes the carsales.com.au mobile platform now generates more page impressions that the desktop platforms of all three major competitors combined.

This leading market position makes attracting potential buyers to competing sites increasingly difficult, something Deutsche sees as a positive with respect to market traction for carsales.com going forward.

On the back of the better than expected profit result, brokers across the market have lifted earnings forecasts. Increases by BA Merrill Lynch have been modest at 1-2% through FY13, while Deutsche has lifted its earnings per share (EPS) estimates by 3% over the same period and Credit Suisse by 3.5-4.5%.

UBS has also made minor increases to estimates, lifting revenue forecasts by 1-2% to reflect both FY11 results and a solid start to FY12 while offsetting this to some extent with higher depreciation and amortisation charges and lower margin expansion assumptions to reflect a higher level of competition.

Consensus EPS forecasts according to the FNArena database now stand at 28c for FY12 and 31.6c for FY13, which compares to the 24c generated in FY11. The changes to earnings estimates have had only a minor impact on price targets, the database showing a consensus target now of $5.48, up from $5.45.

What hasn't changed are positive views on the stock, the FNArena database showing carsales.com scores a perfect six-for-six Buy ratings. There are two factors supporting positive ratings, one being a share buyback of up to 10% of issued capital. As RBS notes, this should be accretive to EPS by around 4%.

The second positive for carsales.com is valuation, as at current levels RBS estimates the stock is trading on a lower multiple to online media sector peers. As an example, RBS calculates while carsales.com is trading on a FY12 earnings multiple of 16 times, Realestate.com.au ((REA)) is trading on a multiple of 19 times for next year. Relative to its historical earnings multiple carsales.com also looks attractive according to RBS.

An added attraction for BA-ML is the auto classifieds market in general and for used cars in particular is at the more defensive end of advertising, so is more likely to remain resilient even in a tough economic environment.

This suggests little downside share price risk, so supporting BA-ML's Buy rating. As RBS also points out, the yield on carsales.com of around 5% fully franked for FY12 is also attractive.

Carsales.com shares had a trading range over the past 12 months of $3.79 to $5.40. At current levels the stock offers upside of around 15% to the consensus price target in the FNArena database.

 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms