CRZ – Carsales.com Limited

Carsales.com Limited (ASX:CRZ) is the largest online automotive, motorcycle and marine classifieds business in Australia.  Carsales employs about 370 people across Australia.

Does this business have a sustainable competitive advantage?
Carsales attracts more Australians interested in buying or selling cars, motorcycles, trucks and boats than any other classified group of websites.  This competitive advantage is known as the network effect in which more advertisers (sellers) leads to more buyers which creates a positive loop leading to even more advertisers.

Carsales appears to be continuously working to widen their business moat by designing new products to assist consumers find good deals for cars and also enhancements that make it easier to list your vehicle or boat for sale.

Carsales have used their dominant position in Australia and the subsequent cash flow generated to make investments in the No. 1 car advertising sites in Brazil, South East Asia and South Korea.  This trend of increasing investment (ownership) in overseas sites and expanding into new geographical locations looks set to continue.

What are the risks facing this business?
Carsales has become the market leader by disrupting the print classifieds industry and designing the leading online automotive classifieds business.  The risk is that it becomes complacent and allows lesser competitors to erode their market share.

However, with Carsales looking to continually enhance their offering to both buyers and sellers, it is hard to envisage that competitors will make large inroads any time soon.

Is it run by able and trustworthy management?
Management has executed a clear strategy to build the best online automotive site in the country.  This has created a business that requires no capital expenditure and continually increases its earnings.  And, the management appear to have made very sensible decisions with their overseas investments to date.

Carsales has generated a return on equity above 60% per annum for the past three years and looks likely to post similar profitability levels in the next couple of years. And, the business is run with significant levels of cash on hand.

In fact, on a combined measurement of return on equity and net cash on hand, my metrics have rated Carsales as the fundamentally strongest business in the country for the past three years in a row.

Is it trading at a bargain price?
Carsales is not cheap from an intrinsic value point-of-view and hasn’t been for years.  However, one cannot reasonably expect to wait for a business as fundamentally sound as this to trade below its valuation.

By my calculations, the business is expected to increase its intrinsic value in FY15 by 15% and increase the value of the business by 9% in FY16 given current forecasts.

The Chart
Carsales appears in the middle of a triangle formation which is pretty much in the middle of an uptrend channel.   Price action over the next few days and weeks will be interesting.

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Summary
In summary, Carsales is a superb business with a sustainable competitive advantage.   It has excellent management who built this business to where it is today.  And, it has the capacity to increase investment in its overseas contemporaries.

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Carsales.com Limited.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.